Edgar Filing: EBAY INC

10-Q

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, 2016


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

For the transition period from _______ to _______

Commission file number 001-37713




	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 22, 2016, there were 1,148,904,240 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, 2016			December 31, 2015
	(In millions, except par value amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,686		$	1,832
Short-term investments	5,327			4,299
Accounts receivable, net	599			619
Other current assets	1,091			1,154
Total current assets	9,703			7,904
Long-term investments	3,370			3,391
Property and equipment, net	1,497			1,554
Goodwill	4,519			4,451
Intangible assets, net	82			90
Other assets	437			365
Total assets	$	19,608		$	17,755
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	6		$	—
Accounts payable	275			349
Accrued expenses and other current liabilities	1,651			1,736
Deferred revenue	115			106
Income taxes payable	60			72
Total current liabilities	2,107			2,263
Deferred and other tax liabilities, net	2,080			2,092
Long-term debt	9,030			6,749
Other liabilities	74			75
Total liabilities	13,291			11,179
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, $0.001 par value; 3,580 shares authorized; 1,143 and 1,184 shares outstanding	2			2
Additional paid-in capital	14,627			14,538
Treasury stock at cost, 486 and 443 shares	(17,204		)	(16,203		)
Retained earnings	8,207			7,713
Accumulated other comprehensive income	685			526
Total stockholders’ equity	6,317			6,576
Total liabilities and stockholders’ equity	$	19,608		$	17,755

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,
	2016			2015
	(In millions, except per share amounts)
	(Unaudited)
Net revenues	$	2,137		$	2,061
Cost of net revenues	477			411
Gross profit	1,660			1,650
Operating expenses:
Sales and marketing	538			519
Product development	239			221
General and administrative	209			302
Provision for transaction losses	52			69
Amortization of acquired intangible assets	8			10
Total operating expenses	1,046			1,121
Income from operations	614			529
Interest and other, net	(23		)	10
Income from continuing operations before income taxes	591			539
Provision for income taxes	(109		)	(90		)
Income from continuing operations	$	482		$	449
Income from discontinued operations, net of income taxes	—			177
Net income	$	482		$	626

Income per share - basic:
Continuing operations	$	0.42		$	0.37
Discontinued operations	—			0.14
Net income per share - basic	$	0.42		$	0.51

Income per share - diluted:
Continuing operations	$	0.41		$	0.37
Discontinued operations	—			0.14
Net income per share - diluted	$	0.41		$	0.51

Weighted average shares:
Basic	1,159			1,216
Diluted	1,170			1,229

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,
	2016			2015
	(In millions)
	(Unaudited)
Net income	$	482		$	626
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation gain (loss)	154			(265		)
Unrealized gains (losses) on investments, net	23			(22		)
Tax benefit (expense) on unrealized gains (losses) on investments, net	(21		)	9
Unrealized gains (losses) on hedging activities, net	3			89
Tax benefit (expense) on unrealized gains (losses) on hedging activities, net	—			(2		)
Other comprehensive income (loss), net of tax	159			(191		)
Comprehensive income	$	641		$	435

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,
	2016			2015
	(In millions)
	(Unaudited)
Cash flows from operating activities:
Net income	$	482		$	626
Income from discontinued operations, net of income taxes	—			(177		)
Adjustments:
Provision for transaction losses	52			69
Depreciation and amortization	167			160
Stock-based compensation	88			93
Changes in assets and liabilities, and other, net of acquisition effects	(148		)	(270		)
Net cash provided by continuing operating activities	641			501
Net cash provided by discontinued operating activities	—			650
Net cash provided by operating activities	641			1,151
Cash flows from investing activities:
Purchases of property and equipment	(158		)	(96		)
Purchases of investments	(2,935		)	(2,420		)
Maturities and sales of investments	2,030			2,019
Other	(12		)	(1		)
Net cash used in continuing investing activities	(1,075		)	(498		)
Net cash used in discontinued investing activities	—			(226		)
Net cash used in investing activities	(1,075		)	(724		)
Cash flows from financing activities:
Proceeds from issuance of common stock	7			38
Repurchases of common stock	(1,001		)	(1,000		)
Excess tax benefits from stock-based compensation	1			20
Tax withholdings related to net share settlements of restricted stock units and awards	(8		)	(51		)
Proceeds from issuance of long-term debt, net	2,216			—
Other	7			—
Net cash provided by (used in) continuing financing activities	1,222			(993		)
Net cash provided by discontinued financing activities	—			8
Net cash provided by (used) in financing activities	1,222			(985		)
Effect of exchange rate changes on cash and cash equivalents	66			(297		)
Net increase (decrease) in cash and cash equivalents	854			(855		)
Cash and cash equivalents at beginning of period	1,832			6,328
Cash and cash equivalents at end of period	$	2,686		$	5,473
Less: Cash and cash equivalents of discontinued operations	—			2,367
Cash and cash equivalents of continuing operations at end of period	$	2,686		$	3,106
Supplemental cash flow disclosures:
Cash paid for interest	$	73		$	74
Cash paid for income taxes	$	31		$	101

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

eBay Inc. is a global commerce leader, including our Marketplace, StubHub and Classifieds platforms. Our Marketplace platforms include our online marketplace located at www.ebay.com, its localized counterparts and the eBay mobile apps. Our StubHub platforms include our online ticket platform located at www.stubhub.com and the StubHub mobile apps. Our Classifieds platforms include a collection of brands such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds and others.

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

Use of estimates

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

Principles of consolidation and basis of presentation

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

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015. We have evaluated all subsequent events through the date these condensed consolidated financial statements were issued. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the condensed consolidated financial statements for interim periods.

Recent Accounting Pronouncements

In 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In 2015, the FASB issued guidance to defer the effective date to fiscal years beginning after December 15, 2017 with early adoption for fiscal years

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

beginning December 15, 2016. In 2016, the FASB issued additional guidance to clarify the implementation guidance. We are evaluating the impact of adopting the new accounting guidance on our consolidated financial statements.

In 2015, the FASB issued new guidance related to presentation of debt issuance costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this standard retrospectively in the first quarter of 2016. The balance sheet as of December 31, 2015 was retrospectively adjusted, which resulted in reductions to other assets of $30 million and long-term debt of $30 million.

In 2016, the FASB issued new guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2016, the FASB issued new guidance related to accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2016, the FASB issued new guidance to revise aspects of stock-based compensation guidance which include income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 equity incentive awards 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 common 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,
	2016		2015
	(In millions, except per share amounts)
Numerator:
Income from continuing operations	$	482	$	449
Income from discontinued operations, net of income taxes	—		177
Net income	$	482	$	626
Denominator:
Weighted average shares of common stock - basic	1,159		1,216
Dilutive effect of equity incentive awards	11		13
Weighted average shares of common stock - diluted	1,170		1,229
Income per share - basic:
Continuing operations	$	0.42	$	0.37
Discontinued operations	—		0.14
Net income per share - basic	$	0.42	$	0.51
Income per share - diluted:
Continuing operations	$	0.41	$	0.37
Discontinued operations	—		0.14
Net income per share - diluted	$	0.41	$	0.51
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive	6		4

Note 3 — Discontinued Operations

On June 26, 2015, our Board approved the separation of PayPal through the distribution of 100% of the outstanding common stock of PayPal Holdings, Inc. ("PayPal") to our stockholders (the "Distribution"). To consummate the Distribution, our Board declared a pro rata dividend of PayPal Holdings, Inc. common stock to eBay’s stockholders of record as of the close of business on July 8, 2015 (the “Record Date”). Each eBay stockholder received one (1) share of PayPal Holdings, Inc. common stock for every share of eBay common stock held at the close of business on the Record Date. The Distribution occurred on July 17, 2015. Immediately following the Distribution, PayPal became an independent, publicly traded company and is listed on The NASDAQ Stock Market under the ticker “PYPL.” eBay continues to trade on The NASDAQ Stock Market under the ticker “EBAY.” We have classified the results of PayPal as discontinued operations in our consolidated statement of income for all periods presented. In connection with the Distribution, we reviewed our capital allocation strategy to ensure that each of PayPal and eBay would be well capitalized at Distribution. Pursuant to the terms of the separation and distribution agreement entered into between us and PayPal on June 26, 2015, upon Distribution, assets related to the PayPal business were transferred to, and liabilities related to the PayPal business were retained or assumed by, PayPal. As part of this strategy, we contributed approximately $3.8 billion of cash to PayPal in 2015.

During the second quarter of 2015, our Board approved a plan to sell the businesses underlying our former Enterprise segment (“Enterprise”). Based on the expected sales proceeds, we recorded a goodwill impairment of $786 million in the second quarter of 2015. On July 16, 2015, we signed a definitive agreement to sell Enterprise for $925 million and on November 2, 2015, the sale closed. We recorded a loss of $35 million upon closing included within income from discontinued

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

operations, net of income taxes. We have classified the results of Enterprise as discontinued operations in our condensed consolidated statement of income for all periods presented.

The financial results of PayPal and Enterprise are presented as income from discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents the combined financial results of PayPal and Enterprise for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016			2015
	(In millions)
Net revenues	$	—		$	2,387
Cost of net revenues	—			1,039
Gross profit	—			1,348
Operating expenses:
Sales and marketing	—			275
Product development	—			264
General and administrative	(2		)	363
Provision for transaction and loan losses	—			195
Amortization of acquired intangible assets	—			48
Total operating expenses	(2		)	1,145
Income from operations of discontinued operations	2			203
Interest and other, net	—			(2		)
Income from discontinued operations before income taxes	2			201
Provision for income taxes	(2		)	(24		)
Income from discontinued operations, net of income taxes	$	—		$	177

Note 4 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the three months ended March 31, 2016:



	December 31, 2015		Goodwill Acquired		Adjustments		March 31, 2016
	(In millions)
Goodwill	$	4,451	$	6	$	62	$	4,519

The adjustments to goodwill during the three months ended March 31, 2016 were due primarily to foreign currency translation.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible Assets

The components of identifiable intangible assets are as follows:



	March 31, 2016								December 31, 2015
	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	$	425	$	(408	)	$	17	5	$	419	$	(399	)	$	20	5
Marketing related	608		(586		)	22		5	594		(570		)	24		5
Developed technologies	244		(221		)	23		4	238		(215		)	23		4
All other	157		(137		)	20		4	157		(134		)	23		4
	$	1,434	$	(1,352	)	$	82		$	1,408	$	(1,318	)	$	90

Amortization expense for intangible assets was $12 million and $16 million for the three months ended March 31, 2016 and 2015, respectively.

Expected future intangible asset amortization as of March 31, 2016 is as follows (in millions):



Fiscal years:
Remaining 2016	$	35
2017	35
2018	11
2019	1
2020	—
Thereafter	—
	$	82

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 5 — Segments

We have one operating and reportable segment. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

The following table sets forth the breakdown of net revenues by type for the periods presented:



	Three Months Ended March 31,
	2016		2015
	(In millions)
Net Revenues by Type:
Net transaction revenues:
Marketplace	$	1,500	$	1,536
StubHub	177		132
Total net transaction revenues	1,677		1,668
Marketing services and other revenues:
Marketplace	274		235
Classifieds	186		162
Corporate and other	—		(4		)
Total marketing services and other revenues	460		393
Total net revenues	$	2,137	$	2,061

Note 6 — Investments

At March 31, 2016 and December 31, 2015, the estimated fair value of our short-term and long-term investments classified as available for sale, were as follows:



	March 31, 2016
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Short-term investments:
Restricted cash	$	25	$	—	$	—		$	25
Corporate debt securities ⁽¹⁾	4,349		2		(56		)	4,295
Government and agency securities	50		—		—			50
Equity instruments	9		948		—			957
	$	4,433	$	950	$	(56	)	$	5,327
Long-term investments:
Corporate debt securities ⁽¹⁾	3,266		16		(42		)	3,240
	$	3,266	$	16	$	(42	)	$	3,240

(1) At March 31, 2016 investment securities with a fair value and an unrealized foreign exchange loss of $1.1 billion and $55 million, respectively, were held by a foreign subsidiary in which the U.S. Dollar is not the functional currency.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



	December 31, 2015
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Short-term investments:
Restricted cash	$	28	$	—	$	—		$	28
Corporate debt securities	3,302		1		(16		)	3,287
Government and agency securities	55		—		—			55
Equity instruments	9		920		—			929
	$	3,394	$	921	$	(16	)	$	4,299
Long-term investments:
Corporate debt securities	3,327		7		(67		)	3,267
	$	3,327	$	7	$	(67	)	$	3,267

At March 31, 2016, investment securities in a continuous loss position for greater than 12 months had an estimated fair value and unrealized loss of $485 million and $35 million, respectively. At December 31, 2015, investment securities in a continuous loss position for greater than 12 months had an estimated fair value and unrealized loss of $769 million and $40 million, respectively. Refer to “Note 14 - Accumulated Other Comprehensive Income” for amounts reclassified to earnings from unrealized gains and losses.

The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity at March 31, 2016 are as follows:



	March 31, 2016
	(In millions)
One year or less (including restricted cash of $25)	$	4,369
One year through two years	1,476
Two years through three years	1,482
Three years through four years	242
Four years through five years	36
Five years through six years	—
Six years through seven years	—
Seven years through eight years	5
Eight years through nine years	—
Nine years through ten years	—
	$	7,610

Equity and cost method investments

We have made multiple equity and cost method investments which are reported in long-term investments on our condensed consolidated balance sheet. As of March 31, 2016 and December 31, 2015, our equity and cost method investments totaled $130 million and $124 million, respectively.

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7 — 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, 2016 and December 31, 2015:



Description	Balance as of March 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	2,686	$	2,156	$	530
Short-term investments:
Restricted cash	25		25		—
Corporate debt securities	4,295		—		4,295
Government and agency securities	50		—		50
Equity instruments	957		957		—
Total short-term investments	5,327		982		4,345
Derivatives	190		—		190
Long-term investments:
Corporate debt securities	3,240		—		3,240
Total long-term investments	3,240		—		3,240
Total financial assets	$	11,443	$	3,138	$	8,305

Liabilities:
Derivatives	$	62	$	—	$	62



Description	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	1,832	$	1,664	$	168
Short-term investments:
Restricted cash	28		28		—
Corporate debt securities	3,287		—		3,287
Government and agency securities	55		—		55
Equity instruments	929		929		—
Total short-term investments	4,299		957		3,342
Derivatives	97		—		97
Long-term investments:
Corporate debt securities	3,267		—		3,267
Total long-term investments	3,267		—		3,267
Total financial assets	$	9,495	$	2,621	$	6,874

Liabilities:
Derivatives	$	25	$	—	$	25

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our financial assets and liabilities are valued using market prices on both active markets (level 1) and less active markets (level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. We did not have any transfers of financial instruments between valuation levels during the three months ended March 31, 2016.

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, certificates of deposit and commercial paper.

In addition, we had cost and equity method investments of approximately $130 million and $124 million included in long-term investments on our condensed consolidated balance sheet at March 31, 2016 and December 31, 2015, respectively.

Our derivative instruments vary in duration depending on contract type. Our foreign exchange derivative contracts 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. The duration of our interest rate derivative contracts match the duration of the fixed rate notes due 2019, 2021 and 2024.

As of March 31, 2016 and December 31, 2015, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

Other financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value because of the short-term nature of these instruments.

Note 8 — Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. To further limit credit risk, we also enter into collateral security arrangements related to certain interest rate derivative instruments whereby collateral is posted between counterparties if the fair value of the derivative instrument exceeds certain thresholds. Additional collateral would be required in the event of a significant credit downgrade by either party.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We use foreign currency exchange contracts, primarily short-term in nature, generally one month to one year in duration but with maturities up to 18 months, to reduce the volatility of cash flows primarily related to forecasted revenues, expenses, assets and liabilities denominated in foreign currencies. The objective of the foreign exchange contracts is to better ensure that ultimately the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. For derivative instruments that are designated as cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our foreign exchange contracts on a quarterly basis. We do not use any foreign exchange contracts for trading purposes.

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, 2016, we have estimated that approximately $42 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.

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Interest Rate Contracts

In connection with the July 2014 issuance of our fixed rate notes due 2019, 2021 and 2024, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with $2.4 billion of these notes so that the interest payable on these senior notes effectively became variable based on London InterBank Offered Rate (LIBOR) plus a spread. We have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges. These transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair value of certain of our fixed rate borrowings due to benchmark interest rate movements. Changes in the fair values of these interest rate swap agreements are recognized in other assets or other liabilities with a corresponding increase or decrease in long-term debt. Each quarter we pay interest based on LIBOR plus a spread to the counterparty and on a semi-annual basis receive interest from the counterparty per the fixed rate of these senior notes. The net amount is recognized as interest expense in interest and other, net. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our contracts on a quarterly basis. We do not use any interest rate swap agreements for trading purposes.

For our derivative instruments designated as fair value hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of March 31, 2016 and December 31, 2015 were as follows:



	Balance Sheet Location	March 31, 2016		December 31, 2015
		(In millions)
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges	Other Current Assets	$	54	$	42
Foreign exchange contracts not designated as hedging instruments	Other Current Assets	32		14
Interest rate contracts designated as fair value hedges	Other Assets	104		41
Total derivative assets		$	190	$	97

Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges	Other Current Liabilities	$	12	$	1
Foreign exchange contracts not designated as hedging instruments	Other Current Liabilities	50		24
Total derivative liabilities		$	62	$	25

Total fair value of derivative instruments		$	128	$	72

Under the master netting agreements with the respective counterparties to our derivative contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheet. As of March 31, 2016, the potential effect of rights of set-off associated with the foreign exchange contracts discussed above would be an offset to both assets and liabilities by $56 million, resulting in net derivative assets and derivative liabilities of $30 million and $6 million, respectively. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions. As of March 31, 2016, we had neither pledged nor received collateral related to our interest rate derivative transactions.

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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, 2016 and December 31, 2015, and the impact of these derivative contracts on accumulated other comprehensive income for the three months ended March 31, 2016:



	December 31, 2015		Amount of gain (loss) recognized in other comprehensive income (effective portion)		Amount of gain (loss) reclassified from accumulated other comprehensive income to earnings (effective portion)		March 31, 2016
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	36	$	19	$	16	$	39

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of March 31, 2015 and December 31, 2014, and the impact of these derivative contracts on accumulated other comprehensive income for the three months ended March 31, 2015:



	December 31, 2014		Amount of gain (loss) recognized in other comprehensive income (effective portion)		Amount of gain (loss) reclassified from accumulated other comprehensive income to earnings (effective portion)		March 31, 2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	41	$	45	$	20	$	66

Effect of Derivative Contracts on Condensed Consolidated Statement of Income

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



	Three Months Ended March 31,
	2016			2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues and operating expenses	$	4		$	20
Foreign exchange contracts designated as cash flow hedges recognized in interest and other, net	12			—
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net	(2		)	16
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income	$	14		$	36

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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



	Three Months Ended March 31,
	2016			2015
	(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net	$	63		$	37
Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net	(63		)	(37		)
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income	$	—		$	—

Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts are determined. The following table provides the notional amounts of our outstanding derivatives:



	March 31,
	2016		2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	1,542	$	489
Foreign exchange contracts not designated as hedging instruments	2,864		2,256
Interest rate contracts designated as fair value hedges	2,400		2,400
Total	$	6,806	$	5,145

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Note 9 — Debt

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



	Coupon		As of			Effective		As of			Effective
	Rate		March 31, 2016			Interest Rate		December 31, 2015			Interest Rate
	(In millions, except percentages)
Long-Term Debt
Floating Rate Notes:
Senior notes due 2017	LIBOR plus 0.20%		$	450		0.651	%	$	450		0.586	%
Senior notes due 2019	LIBOR plus 0.48%		400			0.853	%	400			0.825	%

Fixed Rate Notes:
Senior notes due 2017	1.350	%	1,000			1.456	%	1,000			1.456	%
Senior notes due 2018	2.500	%	750			2.775	%	—			—	%
Senior notes due 2019	2.200	%	1,150			2.346	%	1,150			2.346	%
Senior notes due 2020	3.250	%	500			3.389	%	500			3.389	%
Senior notes due 2021	2.875	%	750			2.993	%	750			2.993	%
Senior notes due 2022	3.800	%	750			3.989	%	—			—	%
Senior notes due 2022	2.600	%	1,000			2.678	%	1,000			2.678	%
Senior notes due 2024	3.450	%	750			3.531	%	750			3.531	%
Senior notes due 2042	4.000	%	750			4.114	%	750			4.114	%
Senior notes due 2056	6.000	%	750			6.547	%	—			—	%
Total senior notes			9,000					6,750
Hedge accounting fair value adjustments			104					41
Unamortized discount and debt issuance costs			(74		)			(42		)
Total long-term debt			$	9,030				$	6,749

Short-Term Debt
Other indebtedness			6					—
Total short-term debt			6					—
Total Debt			$	9,036				$	6,749

Senior Notes

In the three months ended March 31, 2016, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of $2.25 billion. This consists of $750 million aggregate principal amount of 2.500% fixed rate notes due 2018, $750 million aggregate principal amount of 3.800% fixed rate notes due 2022 and $750 million aggregate principal amount of 6.000% fixed rate notes due 2056.

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

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To help achieve our interest rate risk management objectives, in connection with the previous issuance of certain senior notes, we entered into interest rate swap agreements that effectively converted $2.4 billion of our fixed rate debt to floating rate debt based on LIBOR plus a spread. These swaps were designated as fair value hedges against changes in the fair value of certain fixed rate senior notes resulting from changes in interest rates. The gains and losses related to changes in the fair value of interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to changes in market interest rates.

The effective interest rates for our senior notes include the interest payable, the amortization of debt issuance costs and the amortization of any original issue discount on these senior notes. Interest on these senior notes is payable either quarterly or semiannually. Interest expense associated with these senior notes, including amortization of debt issuance costs, during the three months ended March 31, 2016 and 2015 was approximately $50 million and $45 million, respectively. At March 31, 2016, the estimated fair value of these senior notes was approximately $8.9 billion.

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

Commercial Paper

We have an up to $1.5 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue in an aggregate principal amount at maturity of up to $1.5 billion outstanding at any time. As of March 31, 2016, there were no commercial paper notes outstanding.

Credit Agreement

As of March 31, 2016, no borrowings were outstanding under our $2 billion credit agreement. However, as described above, we have an up to $1.5 billion commercial paper program and therefore maintain $1.5 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due. As a result, at March 31, 2016, $500 million of borrowing capacity was available for other purposes permitted by the credit agreement. The credit agreement includes customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio. The events of default include the occurrence of a change of control (as defined in the credit agreement) with respect to us.

We were in compliance with all covenants in our outstanding debt instruments for the three-month period ended March 31, 2016.

Note 10 — Commitments and Contingencies

Litigation and Other Legal Matters

Overview

We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a proceeding, we have disclosed that fact. In assessing the materiality of a proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the

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matters disclosed in this Note 10, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the three months ended March 31, 2016. Except as otherwise noted for the proceedings described in this Note 10, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

Litigation

In March 2015, StubHub filed suit against Ticketmaster and the Golden State Warriors, alleging antitrust and various state law violations arising out of the defendants’ restrictive ticketing practices, which include prohibiting the resale of Warriors tickets on StubHub or any other non-Ticketmaster secondary exchange (StubHub, Inc. v. Golden State Warriors, LLC et al, N.D. Cal. No. 3:15-cv-01436). StubHub filed a First Amended Complaint on June 30, 2015. The defendants filed a Motion to Dismiss the Amended Complaint which was granted in November 2015. StubHub is appealing this decision.

Regulatory Proceedings

In May 2014, we publicly announced that criminals were able to penetrate our network and steal certain data, including user names, encrypted user passwords and other non-financial user data. Upon making this announcement, we required all buyers and sellers on our platform to reset their passwords in order to login to their account. In addition to making this public announcement, we proactively approached a number of regulatory and governmental bodies, including those with the most direct supervisory authority over our data privacy and data security programs, to specifically inform them of the incident and our actions to protect our customers in response. Certain of those regulatory agencies have requested us to provide further, more detailed information regarding the incident, and we believe that we have fully cooperated in all of those requests. To date, we have not been informed by any regulatory authority of an intention to bring any enforcement action arising from this incident; however, in the future we may be subject to fines or other regulatory action. In addition, in July 2014, a putative class action lawsuit was filed against us for alleged violations and harm resulting from the incident. The lawsuit was dismissed with leave to amend.

General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions and divestitures and in cases where we are entering new lines of business. We have in the past been forced to litigate such claims. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts, and as we expand the scope of our business (both in terms of the range of products and services that we offer and our geographical operations) and become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less favorable. We believe that additional lawsuits alleging that we have violated patent, copyright or trademark laws will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements on unfavorable terms.

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our users (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our practices, prices, rules, policies or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies or agreements. Further, the number and significance of these disputes and inquiries are increasing as we have grown larger, our businesses have expanded in scope (both in terms of the range of products and services that we offer and our geographical operations) and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards (including statutory damages for certain causes of action in certain

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

jurisdictions), injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.

Indemnification Provisions

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

In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In certain cases, we have agreed to provide indemnification for intellectual property infringement. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our consolidated statement of income in connection with our indemnification provisions have not been significant, either individually or collectively.

Off-Balance Sheet Arrangements

As of March 31, 2016, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

We have a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the same financial institution (“Aggregate Cash Deposits”). This arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement. As of March 31, 2016, we had a total of $1.4 billion in cash withdrawals offsetting our $1.4 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

Note 11 — Stock Repurchase Programs

In January 2015, our Board authorized an additional $2 billion stock repurchase program, with no expiration from the date of authorization. In June 2015, our Board authorized an additional $1 billion stock repurchase program, with no expiration from the date of authorization. The stock repurchase programs are intended to programmatically offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to make opportunistic repurchases of our common stock to reduce our outstanding share count. Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions (including accelerated share repurchase transactions) or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The stock repurchase activity under our stock repurchase programs during the three months ended March 31, 2016 is summarized as follows:



	Shares Repurchased	Average Price per Share ⁽¹⁾		Value of Shares Repurchased	Remaining Amount Authorized
	(In millions, except per share amounts)
Balance as of January 1, 2016					$	1,836
Repurchase of shares of common stock	42	$	23.67	1,000	(1,000		)
Balance as of March 31, 2016					$	836

(1) Excludes broker commissions.

As of March 31, 2016, a total of approximately $836 million remained available for future repurchases of our common stock under our June 2015 stock repurchase program. These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.

Note 12 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2016:



	Options
	(In millions)
Outstanding as of January 1, 2016	7
Granted and assumed	—
Exercised	—
Forfeited/expired/canceled	(1	)
Outstanding as of March 31, 2016	6

Restricted Stock Unit Activity

The following table summarizes restricted stock unit (“RSU”) activity for the three months ended March 31, 2016:



	Units
	(In millions)
Outstanding as of January 1, 2016	36
Awarded and assumed	1
Vested	(1	)
Forfeited	—
Outstanding as of March 31, 2016	36

The weighted average grant date fair value for RSUs awarded during the period was $23.31 per share.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three months ended March 31, 2016 and 2015 was as follows:



	Three Months Ended March 31,
	2016		2015
	(In millions)
Cost of net revenues	$	7	$	8
Sales and marketing	21		24
Product development	31		29
General and administrative	29		32
Total stock-based compensation expense	$	88	$	93
Capitalized in product development	$	3	$	3

Stock Option Valuation Assumptions

We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the three months ended March 31, 2015:



	Three Months Ended March 31,
	2015
Risk-free interest rate	1.46	%
Expected life (in years)	4.4
Dividend yield	—	%
Expected volatility	27	%

An immaterial amount of stock options were granted during the three months ended March 31, 2016.

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 13 — Income Taxes

We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2013 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for certain tax years after 2002 include, among others, the U.S. (Federal and California), France, Germany, Italy, Korea, Israel, Switzerland, Singapore, United Kingdom and Canada.

Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits or obligations, and the risk of the Tax Court’s decision being overturned upon appeal, we have

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not recorded any benefit or expense as of March 31, 2016. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

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, 2016:



	Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains on Investments			Foreign Currency Translation			Estimated tax (expense) benefit			Total
	(In millions)
Beginning balance	$	36	$	845		$	(45	)	$	(310	)	$	526
Other comprehensive income (loss) before reclassifications	19		18			154			(21		)	170
Amount of gain (loss) reclassified from accumulated other comprehensive income	16		(5		)	—			—			11
Net current period other comprehensive income	3		23			154			(21		)	159
Ending balance	$	39	$	868		$	109		$	(331	)	$	685

The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended March 31, 2015:



	Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains on Investments			Foreign Currency Translation			Estimated tax (expense) benefit			Total
	(In millions)
Beginning balance	$	168	$	1,029		$	334		$	(360	)	$	1,171
Other comprehensive income (loss) before reclassifications	159		(23		)	(265		)	7			(122		)
Amount of gain (loss) reclassified from accumulated other comprehensive income	70		(1		)	—			—			69
Net current period other comprehensive income	89		(22		)	(265		)	7			(191		)
Ending balance	$	257	$	1,007		$	69		$	(353	)	$	980

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The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2016 and 2015:



Details about Accumulated Other Comprehensive Income Components	Affected Line Item in the Statement of Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
		Three Months Ended March 31, 2016			Three Months Ended March 31, 2015

Gains (losses) on cash flow hedges - foreign exchange contracts	Cost of net revenues	$	2		$	6
	Sales and marketing	—			1
	Product development	2			11
	General and administrative	—			2
	Interest and other, net	12			—
	Total, from continuing operations before income taxes	16			20
	Provision for income taxes	—			—
	Total, from continuing operations net of income taxes	16			20
	Total, from discontinued operations net of income taxes	—			50
	Total, net of income taxes	16			70

Unrealized gains (losses) on investments	Interest and other, net	(5		)	(1		)
	Total, before income taxes	(5		)	(1		)
	Provision for income taxes	—			—
	Total, net of income taxes	(5		)	(1		)

Total reclassifications for the period	Total, net of income taxes	$	11		$	69

Note 15 — Restructuring

In January 2015, at a regular meeting of our Board, our Board approved a plan to implement a strategic reduction of our existing global workforce. As a result, we reduced our workforce globally. The reduction was completed in the first half of 2015. The restructuring costs are aggregated in general and administrative expenses in the condensed consolidated statement of income.

No restructuring costs were recognized during the three months ended March 31, 2016. $60 million of restructuring costs were recognized during the three months ended March 31, 2015. No liability remained at March 31, 2016 for these restructuring costs.


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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Part II — Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q as well as in our condensed consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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

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

Overview

Net revenues for the three months ended March 31, 2016 increased 4% to $2.1 billion compared to the same period of the prior year. FX-Neutral (as defined below) net revenue increased 6% for the three months ended March 31, 2016 compared to the same period of the prior year. Operating margin increased to 29% for the three months ended March 31, 2016 compared to 26% in the same period of the prior year. Diluted earnings per share from continuing operations increased to $0.41 for the three months ended March 31, 2016 compared to $0.37 in the same period of the prior year. We generated cash flow from continuing operating activities of $641 million for the three months ended March 31, 2016 compared to $501 million in the same period of the prior year.

Impact of Foreign Currency Exchange Rates

Our commerce platforms operate globally, resulting in certain revenues that are denominated in foreign currencies, primarily the Euro, British pound, Korean won and Australian dollar, subjecting us to foreign currency risk which may adversely impact our financial results. We calculate the year-over-year impact of foreign currency movements using prior period foreign currency rates applied to current year transactional currency amounts. The foreign exchange (“FX”) neutral, or constant currency, net revenue amounts are non-GAAP financial measures and are not in accordance with, or an alternative to, measures prepared in accordance with generally accepted accounting principles (“GAAP”). The information in this section should be read in connection with the information in “Non-GAAP Measure of Financial Performance.”

Because we generated a majority of our net revenues internationally, including the three months ended March 31, 2016 and 2015, we are subject to the risks of doing business in foreign countries as discussed under “Part II - Item 1A - Risk Factors.”

The following table sets forth a reconciliation of FX-Neutral GMV and FX-Neutral net revenues (each as defined below) to our reported GMV and net revenues for the periods presented:



	Three Months Ended March 31, 2016							Three Months Ended March 31, 2015
	As Reported		Exchange Rate Effect⁽¹⁾			FX-Neutral⁽²⁾		As Reported			As Reported Percent Change		FX-Neutral Percent Change
	(In millions, except percentage changes)
GMV ⁽³⁾:
Marketplace	$	19,581	$	(624	)	$	20,205	$	19,476		1	%	4	%
StubHub	869		(1		)	870		675			29	%	29	%
Total GMV	$	20,450	$	(625	)	$	21,075	$	20,151		1	%	5	%

Net transaction revenues:
Marketplace	$	1,500	$	(44	)	$	1,544	$	1,536		(2	)%	1	%
StubHub	177		—			177		132			34	%	34	%
Total net transaction revenues	1,677		(44		)	1,721		1,668			1	%	3	%
Marketing services and other revenues:
Marketplace	274		(5		)	279		235			17	%	19	%
Classifieds	186		(4		)	190		162			15	%	17	%
Corporate and other	—		—			—		(4		)	**		**
Total marketing services and other revenues	460		(9		)	469		393			17	%	19	%
Total net revenues	$	2,137	$	(53	)	$	2,190	$	2,061		4	%	6	%


(1)	We define exchange rate effect as the year-over-year impact of foreign currency movements using prior period foreign currency rates applied to current year transactional currency amounts.


(2)	We define FX-Neutral Gross Merchandise Volume as Gross Merchandise Volume minus the exchange rate effect. We define the non-GAAP financial measures of FX-Neutral net revenue as net revenue minus the exchange rate effect.

(3)

We define Gross Merchandise Volume (“GMV”) as the total value of all successfully closed transactions between users on our Marketplace and StubHub platforms during the applicable period regardless of whether the buyer and seller actually consummated the transaction. We believe that GMV provides a useful measure of the overall volume of closed transactions that flow through our platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated.

Cost of net revenues were positively impacted by $10 million (inclusive of a positive impact of approximately $2 million from hedging activities) due to foreign currency movements relative to the U.S. dollar in the three months ended March 31, 2016 compared to the same period in the prior year.

Operating expenses were positively impacted by $20 million (inclusive of a positive impact of approximately $2 million from hedging activities) due to foreign currency movements relative to the U.S. dollar in the three months ended March 31, 2016 compared to the same period in the prior year.

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

Results of Operations

Summary of Net Revenues

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

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



	Three Months Ended March 31,
	2016		2015
	(In millions)
Net Revenues by Type:
Net transaction revenues:
Marketplace	$	1,500	$	1,536
StubHub	177		132
Total net transaction revenues	1,677		1,668
Marketing services and other revenues:
Marketplace	274		235
Classifieds	186		162
Corporate and other	—		(4		)
Total marketing services and other revenues	460		393
Total net revenues	$	2,137	$	2,061

Net Revenues by Geography:
U.S.	$	909	$	864
International	1,228		1,197
Total net revenues	$	2,137	$	2,061

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

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
	2016			2015			Change
	(In millions, except percentage changes)
Supplemental Operating Data:
GMV:
Marketplace	$	19,581		$	19,476		1	%
StubHub	869			675			29	%
Total GMV	$	20,450		$	20,151		1	%

Transaction take rate:
Marketplace ⁽¹⁾	7.66		%	7.89		%	(0.23	)%
StubHub ⁽²⁾	20.37		%	19.56		%	0.81	%
Total transaction take rate ⁽³⁾	8.20		%	8.28		%	(0.08	)%

(1) We define Marketplace transaction take rate as Marketplace net transaction revenues divided by Marketplace GMV.

(2) We define StubHub transaction take rate as StubHub net transaction revenues divided by StubHub GMV.

(3) We define total transaction take rate as total net transaction revenues divided by GMV.

Seasonality

The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly changes in these net revenues:



	Three Months Ended
	March 31			June 30			September 30			December 31
	(In millions, except percentage changes)
2014
Net revenues	$	2,149		$	2,168		$	2,150		$	2,323
Percent change from prior quarter	(6		)%	1		%	(1		)%	8		%
2015
Net revenues	$	2,061		$	2,110		$	2,099		$	2,322
Percent change from prior quarter	(11		)%	2		%	(1		)%	11		%
2016
Net revenues	$	2,137		—			—			—
Percent change from prior quarter	(8		)%	—		%	—		%	—		%

We expect transaction activity patterns on our platforms to mirror general consumer buying patterns. We expect that these trends will continue.

Net Transaction Revenues

Net transaction revenues increased $9 million, or 1%, and GMV also increased 1% in the three months ended March 31, 2016 compared to the same period in the prior year. Net transaction revenues represented 78% of total net revenues in the three months ended March 31, 2016 compared to 81% in the same period in the prior year. The increase in net transaction revenues and GMV was driven primarily by FX-Neutral net revenue and FX-Neutral GMV increases offset partially by a negative impact from foreign currency movements relative to the U.S. dollar. FX-Neutral net transaction revenue and FX-Neutral GMV increased 3% and 5% respectively, in the three months ended March 31, 2016 compared to the same period in the prior year. The FX-Neutral GMV increase of 5% was driven by an increase in FX-Neutral Marketplace GMV, and to a lesser extent, StubHub GMV. The total transaction take rate was lower in the three months ended March 31, 2016 compared to the same period in the prior year due to decrease in our Marketplace transaction take rate, partially offset by an increase in our StubHub transaction take rate.

Marketplace net transaction revenues decreased $36 million, or 2%, while Marketplace GMV increased 1%, in the three months ended March 31, 2016 compared to the same period in the prior year. The decrease in Marketplace net transaction revenues was driven primarily by a negative impact from foreign currency movements relative to the U.S. dollar. FX-Neutral Marketplace net transaction revenue and FX-Neutral Marketplace GMV increased 1% and 4% respectively, in the three months ended March 31, 2016 compared to the same period in the prior year. The FX-Neutral Marketplace GMV increase of 4% was driven primarily by an increase in volume in local currencies on our Marketplace platforms internationally and to a lesser extent, the U.S. The increase in FX-Neutral Marketplace net transaction revenue was less than the increase in FX-Neutral Marketplace GMV due to a lower Marketplace transaction take rate. The Marketplace transaction take rate was lower in the three months ended March 31, 2016 compared to the same period in the prior year due to an increase in our buyer and seller incentives, which are accounted for as a reduction of revenue, as well as a shift in vertical and seller mix.

StubHub net transaction revenues increased $45 million, or 34%, while StubHub GMV increased 29% in in the three months ended March 31, 2016 compared to the same period in the prior year. The increase in StubHub net transaction revenues was driven primarily by an increase in StubHub GMV and an increase in StubHub transaction take rate. The StubHub GMV increase was driven primarily by an increase in volume of ticket sales related to Sports and Concerts. The increase in StubHub net transaction revenue was greater than the increase in StubHub GMV due to a higher StubHub transaction take rate. The StubHub transaction take rate was higher in in the three months ended March 31, 2016 compared to the same period in the prior year due primarily to a change in mix of events and sellers on the StubHub platforms.

Net transaction revenues earned internationally totaled $922 million and $920 million during the three months ended March 31, 2016 and 2015, respectively, representing 55% of total net transaction revenues in both periods.

Marketing Services and Other Revenues

Marketing services and other revenues increased $67 million, or 17%, in the three months ended March 31, 2016 compared to the same period of the prior year. The increase was driven primarily by an increase in FX-Neutral marketing services and other revenues offset partially by a negative impact from foreign currency movements relative to the U.S. dollar. FX-Neutral marketing services and other revenues increased 19% in the three months ended March 31, 2016 compared to the same period of the prior year. The FX-Neutral marketing services and other revenues increase was driven by increased FX-Neutral Marketplace marketing services and other revenues, and to a lesser extent, increased FX-Neutral Classifieds marketing services and other revenues.

Marketplace marketing services and other revenues increased $39 million, or 17%, in the three months ended March 31, 2016 compared to the same period of the prior year. The increase was driven primarily by an increase in FX-Neutral Marketplace marketing services and other revenues offset partially by a negative impact from foreign currency movements relative to the U.S. dollar. FX-Neutral Marketplace marketing services and other revenues increased by 19% in the three months ended March 31, 2016 compared to the same period of the prior year. The increase in FX-Neutral Marketplace marketing services and other revenues was primarily driven by increased fees earned for referral services and increased revenue in local currencies from advertising display on our Marketplace platforms. The increase in fees earned for referral services consist primarily of fees for customers acquired and incentives for the usage of PayPal products on certain Marketplace platforms, which were not included in marketing services and other revenues prior to the distribution of PayPal.

Classifieds marketing services and other revenues increased $24 million, or 15%, in the three months ended March 31, 2016 compared to the same period of the prior year. The increase was driven primarily by an increase in FX-Neutral Classifieds marketing services and other revenues offset partially by a negative impact from foreign currency movements relative to the U.S. dollar. FX-Neutral Classifieds marketing services and other revenues increased by 17% in the three months ended