| Notes to Financial Statements | |
| 6 Months Ended
Jun. 30, 2009
USD / shares
|
| Notes to Financial Statements [Abstract] | |
| Note 1 - The Company and Summary of Significant Accounting Policies |
Note1 The Company and Summary of Significant Accounting Policies
The Company
eBay Inc. (eBay) was incorporated in California in May 1996, and reincorporated in Delaware in April 1998. eBays purpose is to pioneer new communities around the world, built on commerce, sustained by trust, and inspired by opportunity. eBay brings together millions of buyers and sellers every day on a local, national and international basis through an array of websites. eBay provides online marketplaces for the sale of goods and services, online payment services and online communication offerings to a diverse community of individuals and businesses.
We operate three primary business segments: Marketplaces, Payments and Communications. Our Marketplaces segment provides the infrastructure to enable global online commerce on a variety of platforms, including the traditional eBay.com platform, our other online platforms, such as our online classifieds businesses, our secondary tickets marketplace (StubHub), our online shopping comparison website (Shopping.com), our apartment listing service platform (Rent.com), as well as our fixed price media marketplace (Half.com). Our Payments segment is comprised of our online payment solutions PayPal and Bill Me Later (which we acquired in November 2008). Our Communications segment, which consists of Skype, enables Internet communications between Skype users and provides low-cost connectivity to traditional fixed-line and mobile telephones.
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 requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, legal contingencies, income taxes, revenue recognition, stock-based compensation and the recoverability of goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Principles of consolidation and basis of presentation
The accompanying financial statements are consolidated and include the financial statements of eBay and our majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We have evaluated all subsequent events through the date the financial statements were issued.
The condensed consolidated financial statements include 100% of the assets and liabilities of these majority-owned subsidiaries and the ownership interests of minority investors are recorded as a non-controlling interest. Investments in p |
| Note 2 - Net Income Per Share |
Note2 Net Income Per Share
Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive shares. The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):
Three Months Ended June30, Six Months Ended June 30,
2008 2009 2008 2009
Numerator:
Net income $ 460,345 $ 327,342 $ 920,063 $ 684,455
Denominator:
Weighted average common shares basic 1,312,007 1,288,815 1,322,854 1,286,407
Dilutive effect of equity incentive plans 13,129 11,619 11,664 7,812
Weighted average common shares diluted 1,325,136 1,300,434 1,334,518 1,294,219
Net income per share:
Basic $ 0.35 $ 0.25 $ 0.70 $ 0.53
Diluted $ 0.35 $ 0.25 $ 0.69 $ 0.53
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive 87,384 105,004 89,250 113,938
|
| Note 3 - Business Combinations |
Note3 Business Combinations
Acquisition of Gmarket Inc.
On June15, 2009, we acquired 99.0% of the outstanding securities of Gmarket Inc. (Gmarket), a company organized under the laws of the Republic of Korea (Korea). We paid $24 per security, net to the holders in cash, through a cash tender offer resulting in a total cash purchase price of approximately $1.2 billion. Gmarket is a retail ecommerce marketplace in Korea, and is included in our Marketplaces segment. The rationale for acquiring Gmarket was to create a leading ecommerce business in South Korea and a platform for expansion throughout Asia.
The fair value of Gmarkets stock options assumed was determined using the Black-Scholes model. The fair value of the non-controlling interest was determined based on the number of shares held by minority securityholders multiplied by the offer price of $24 per security. The following table summarizes the consideration paid for Gmarket (in thousands):
Cash $ 1,209,433
Assumed stock options 5,361
Fair value of total consideration 1,214,794
Fair value of non-controlling interest 12,174
Total $ 1,226,968
The purchase price was allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired has been determined primarily by using the income approach and variation of the income approach known as the profit allocation method, which discounts expected future cash flows to present value using estimates and assumptions determined by management. Purchased identifiable intangible assets are amortized on a straight-line basis over their respective useful lives. Our preliminary allocation of the purchase price is summarized in the table below (in thousands):
Net assets acquired $ 50,526
Goodwill 797,946
Trade name 264,604
User base 76,512
Developed technology 33,076
Other intangible assets 4,304
Total $ 1,226,968
Our estimated useful life of the identifiable intangible assets acquired is three years for developed technology, five years for the trade name and user base and one year for other intangibles. The allocation of the purchase price for the acquisition has been prepared on a preliminary basis and changes to that allocation may occur as additional information becomes available.
Gmarkets financial results have been included in our condensed consolidated statement of income as of June16, 2009. The amount of revenue and earnings included in the condensed consolidated income statement for the three and six months ended June30, 2009 were not significant to the respective periods. The noncontrolling ownership interest in Gmarket is included in additional paid-in capital in our condensed consolidated balance sheet. Earnings attributable to noncontrolling interests for the three and six months ended June30, 2009 were not significant to the respective periods. The results of opera |
| Note 4 - Goodwill and Intangible Assets |
Note4Goodwill and Intangible Assets
Goodwill
The following table presents goodwill balances and the movements for each of our reportable segments during the six months ended June30, 2009 (in thousands):
December31, 2008 Goodwill Acquired Adjustments June 30, 2009
Reportable segments:
Marketplaces $ 3,053,139 $ 797,946 $ (16,106 ) $ 3,834,979
Payments 2,163,057 (7,463 ) 2,155,594
Communications 1,836,562 (3,685 ) 1,832,877
$ 7,052,758 $ 797,946 $ (27,254 ) $ 7,823,450
Investments accounted for under the equity method of accounting are classified on our balance sheet as long-term investments. Such investments include identifiable intangible assets, deferred tax liabilities and goodwill. As of December31, 2008 and June30, 2009, the goodwill related to our equity investments, included above, was approximately $27.4million.
The adjustments to goodwill during the six months ended June30, 2009 were due primarily to foreign currency translation.
Intangible Assets
The components of identifiable intangible assets are as follows (in thousands, except years):
December 31, 2008 June 30, 2009
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful Life
(years) (years)
Intangible assets:
Customer lists and user base $ 756,829 $ (415,238 ) $ 341,591 6 $ 837,367 $ (480,120 ) $ 357,247 6
Trademarks and trade names 638,930 (393,353 ) 245,577 5 888,690 (454,745 ) 433,945 5
Developed technologies 199,893 (111,973 ) 87,920 3 226,531 (132,216 ) 94,315 3
All other 126,381 (64,803 ) 61,578 4 148,659 (79,729 ) 68,930 4
$ 1,722,033 $ (985,367 ) $ 736,666 $ 2,101,247 $ (1,146,810 ) $ 954,437
As of December31, 2008 and June30, 2009, the net carrying amount of intangible assets related to our equity investments included above was approximately $532,500 and $76,100, respectively. All of our identifiable intangible assets are subject to amortization. Aggregate amortization expense for intangible assets was $66.9million and $81.0 million for the three months ended June30, 2008 and 2009, respectively. Aggregate amortization expense for intangible assets was $128.9million and $161.4 million for the six months ended June30, 2008 and 2009, respectively.
Expected future intangible asset amortization from acquisitions completed as of June30, 2009 is as follows (in thousands):
Fiscal Years:
2009 (remaining six months) $ 180,229
2010 266,682
2011 170,622
2012 136,105
2013 112,826
Thereafter 30,524 |
| Note 5 - Segments |
Note5 Segments
Operating segments are based upon our internal organization structure, the manner in which our operations are managed, the criteria used by our Chief Operating Decision Maker to evaluate segment performance and the availability of separate financial information. We have three operating segments: Marketplaces, Payments and Communications.
The following tables summarize the financial performance of our operating segments (in thousands):
Three Months Ended June 30, 2008
Marketplaces Payments Communications Consolidated
Net revenues from external customers $ 1,458,031 $ 601,795 $ 135,835 $ 2,195,661
Direct costs 819,609 484,522 109,769 1,413,900
Direct contribution $ 638,422 $ 117,273 $ 26,066 781,761
Operating expenses and indirect costs of net revenues 236,394
Income from operations 545,367
Interest and other income, net 22,766
Income before income taxes $ 568,133
Three Months Ended June 30, 2009
Marketplaces Payments Communications Consolidated
Net revenues from external customers $ 1,258,699 $ 669,301 $ 169,992 $ 2,097,992
Direct costs 724,345 561,554 129,865 1,415,764
Direct contribution $ 534,354 $ 107,747 $ 40,127 682,228
Operating expenses and indirect costs of net revenues 270,539
Income from operations 411,689
Interest and other expense, net (4,529 )
Income before income taxes $ 407,160
Six Months Ended June 30, 2008
Marketplaces Payments Communications Consolidated
Net revenues from external customers $ 2,942,347 $ 1,183,374 $ 262,163 $ 4,387,884
Direct costs 1,651,688 933,518 217,114 2,802,320
Direct contribution $ 1,290,659 $ 249,856 $ 45,049 1,585,564
Operating expenses and indirect costs of net revenues 487,420
Income from operations 1,098,144
Interest and other income, net 49,510
Income before income taxes $ 1,147,654
Six Months Ended June 30, 2009
Marketplaces Payments Communications Consolidated
Net revenues from external customers $ 2,483,148 $ 1,312,259 $ 323,171 $ 4,118,578
Direct costs 1,395,959 1,092,523 246,780 2,735,262
Direct contribution $ 1,087,189 $ 219,736 $ 76,391 1,383,316
Operating expenses and indirect costs of net revenues 548,863
Income from operations |
| Note 6 - Fair Value Measurement of Assets and Liabilities |
Note6 Fair Value Measurement of Assets and Liabilities
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June30, 2009 (in thousands):
Description Balance as of June30,2009 QuotedPricesin ActiveMarketsfor Identical Assets (Level 1) SignificantOther ObservableInputs (Level 2)
Assets:
Cash and cash equivalents:
Bank deposits and money market funds $ 2,573,617 $ 2,573,617 $
Total cash and cash equivalents 2,573,617 2,573,617
Short-term investments:
Restricted cash 23,491 23,491
Equity instruments 218,429 218,429
Corporate debt securities 6,991 6,991
Time deposits 192,291 192,291
Total short-term investments 441,202 241,920 199,282
Derivatives 9,429 9,429
Long-term restricted cash 1,157 1,157
Corporate debt securities 38,240 38,240
Long-term time deposits 4,870 4,870
Total financial assets $ 3,068,515 $ 2,816,694 $ 251,821
Liabilities:
Derivatives $ 15,475 $ $ 15,475
Our financial assets and liabilities are valued using market prices on both active markets (level1)and less active markets (level2). Level1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of June30, 2009, we did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (level3). Our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. Our derivative instruments are short-term in nature, typically one month to one year in duration. Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased.
As of June30, 2009, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.
In Europe, we have a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows for cash withdrawals from this financial institution based upon our aggregate operating cash balances held in Europe within the same financial institution (Aggregate Cash Deposits). This arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income. As of June30, 2009, |
| Note 7 - Derivative Instruments |
Note7Derivative Instruments
We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency exchange contracts that qualify as hedges under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), generally with maturities of 12months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and intercompany transactions denominated in certain foreign currencies. The objective of the foreign exchange contracts is to better ensure that the U.S.dollar-equivalent cash flows are not adversely affected by changes in the U.S.dollar-to-foreign currency exchange rate. All outstanding derivatives that qualify for hedge accounting under SFAS 133 are recognized on the balance sheet at fair value and their changes in fair value are recorded in accumulated other comprehensive income (loss) until the underlying forecasted transaction occurs. The effective portion of the derivatives gain or loss is initially reported as a component of accumulated other comprehensive income, and is subsequently reclassified into the financial statements line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. We also hedge our exposure to foreign currency denominated monetary assets and liabilities with foreign currency contracts. Since these derivatives hedge existing exposures that are denominated in foreign currencies, the contracts do not qualify for hedge accounting under SFAS 133. Accordingly, these outstanding non-designated derivatives are recognized on the balance sheet at fair value and changes in fair value from these contracts are recorded in interest and other income, net, in the condensed consolidated statement of income. Our derivatives program is not designed for trading or speculative purposes.
Our derivative instruments expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the agreements. We seek to mitigate this risk by limiting our counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.
Fair Value of Derivative Contracts: Derivative instruments are reported at fair value as follows (in thousands):
DerivativeAssets ReportedinOther Current Assets DerivativeLiabilities Reported in Other Current Liabilities
June 30, 2009 June 30, 2009
Foreign exchange contracts designated as cash flow hedges $ 9,294 $ 15,042
Foreign exchanges contracts not designated as hedging instruments 135 433
Total fair value of derivative instruments $ 9,429 $ 15,475
Effect of Derivative Contracts on Accumulated Other Comprehensive Income (Loss): The following table represents only the balance of derivative contracts under SFAS 133 as of December31, 2008 and June30, 2009, and the impa |
| Note 8 - Commitments and Contingencies |
Note8Commitments and Contingencies
Credit Agreement
As of June30, 2009, we had $400.0 million outstanding and approximately $1.4 billion available under our credit agreement. The interest rate at June30, 2009 was 0.5%. As of June30, 2009, we were in compliance with the financial covenants associated with the credit agreement. Lehman Brothers Commercial Bank was a participating lender in our $2.0 billion credit agreement. As a result of the bankruptcy of its parent company, the availability under our credit agreement was effectively reduced by Lehmans commitment of $160.0 million.
Litigation and Other Legal Matters
In August 2006, Louis Vuitton Malletier and Christian Dior Couture filed two lawsuits in the Paris Court of Commerce against eBay Inc. and eBay International AG. Among other things, the complaint alleges 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 Socit 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 EUR38.6million 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. A hearing is scheduled for September 2009 regarding our compliance with the injunction. We have taken measures to comply with the injunction and have appealed these rulings. However, these and similar suits may force us to modify our business practices, which could lower our revenue, increase our costs, or make our websites less convenient to our customers. Any such results could materially harm our business. Other luxury brand owners have also filed suit against us or have threatened to do so, seeking to hold us liable for, among other things, alleged counterfeit items listed on our websites by third parties, for tester and other not for resale consumer products listed on our websites by third parties, for the alleged misuse of trademarks in listings, for alleged violations of selective distribution channel laws, for alleged violations of parallel import laws, for alleged non-compliance of consumer protection laws or in connection with paid search advertisements. We continue to believe that we have meritorious defenses to these suits and intend to defend ourselves vigorously.
In May 2 |
| Note 9 - Stock-Based Plans |
Note9Stock-Based Plans
Stock Options
The following table summarizes stock option activity for the six-month period ended June30, 2009 (inthousands):
Shares
Outstanding at January 1, 2009 116,060
Granted and assumed 7,485
Exercised (2,402 )
Forfeited/expired/cancelled (17,595 )
Outstanding at June 30, 2009 103,548
Stock options granted under our equity incentive plans generally vest 25% one year from the date of grant (for new hires) and 12.5% six months from the date of grant (for existing employees) and the remainder generally vest at a rate of 2.08%per month thereafter, in either case based on the recipients continuing service to eBay, and generally expire seven to 10 years from the date of grant. The weighted average exercise price of stock options granted and assumed during the period was $11.25 per share and the related weighted average grant date fair value was $4.24 per share.
On April29, 2009, our stockholders approved amendments to certain of our existing equity incentive plans to allow us to implement a one-time option exchange offer, pursuant to which certain outstanding options could be tendered in exchange for the issuance of a lesser amount of restricted stock units, stock options or cash payments. As a result of this approval, the following equity incentive plans have been amended to include this provision: eBay Inc. 2008 Equity Incentive Award Plan, eBay Inc. 2001 Equity Incentive Plan, eBay Inc. 1999 Global Equity Incentive Plan, eBay Inc. 1998 Equity Incentive Plan and Shopping.com Ltd. 2004 Equity Incentive Plan.
Restricted Stock Units
The following table summarizes restricted stock unit (RSU) activity for the six-month period ended June30, 2009 (in thousands):
Units
Outstanding at January 1, 2009 26,821
Awarded 21,995
Vested (5,351 )
Forfeited (1,799 )
Outstanding at June 30, 2009 41,666
In general, RSUs vest over four years at the rate of 25% a year on each anniversary of the grant date, subject to the recipients continuing service to eBay. The cost of RSUs is determined using the fair value of our common stock on the date of grant. The weighted average grant date fair value for restricted stock units awarded during the period was $10.76per share.
Stock-based Compensation Expense
The impact on our results of operations of recording stock-based compensation expense for the three and six months ended June30, 2008 and 2009 was as follows (in thousands):
ThreeMonthsEndedJune30, SixMonthsEndedJune30,
2008 2009 2008 2009
Cost of net revenues $ 10,988 $ 11,696 $ 21,513 $ 26,480
Sales and marketing 24,560 29,203 48,351 62,889
Product development 24,676 25,072 48,169 55,751
General and administrative 31,625 30,463 61,197 65,160
Total stock-based compensation expense $ 91,849 $ 96,434 $ 179,230 $ 210,280
Total stock-based compensation expense included in capitalized development costs was $2.7mil |
| Note 10 - Restructuring |
Note10 Restructuring
2009 North America Customer Service Consolidation
In May 2009, we announced the consolidation of our North America customer service facilities resulting in the closure of our Vancouver, Canada facility, which employs approximately 700 employees.As a result of the consolidation, we estimate that we will incur aggregate costs of $20.0 million to $25.0 million, of which $14.4 million were recorded during the second quarter of 2009. The restructuring activities are expected to be substantially complete by the end of the third quarter of 2009.
2008 Restructuring Plan
In October 2008, we implemented a strategic reduction of our existing global workforce by approximately 800employees worldwide to simplify and streamline our organization and strengthen the overall competitiveness of our existing businesses. As a result of this initiative, we estimate that we will incur aggregate costs of approximately $60.0million to $65.0million. During the second quarter and first six months of 2009, we incurred $3.3 million and $9.9 million in restructuring charges related to this plan, respectively. Since the inception of the plan we have incurred $59.0 million in restructuring related charges.
Summary of All Restructuring Plans
A summary of the restructuring and other costs by segment recognized during the three-month period ended June30, 2009 are as follows (in thousands):
EmployeeSeverance and Benefits Facilities Total
Marketplaces $ 15,670 $ 1,081 $ 16,751
Payments 902 0 902
$ 16,572 $ 1,081 $ 17,653
A summary of the restructuring and other costs by segment recognized during the six-month period ended June30, 2009 is as follows (in thousands):
EmployeeSeverance and Benefits Facilities Total
Marketplaces $ 22,285 $ 1,773 $ 24,058
Payments 193 13 206
$ 22,478 $ 1,786 $ 24,264
The following table summarizes the restructuring activity during the six months ended June30, 2009 (in thousands):
EmployeeSeverance and Benefits Facilities Total
Accrued liability as of January 1, 2009 $ (14,200 ) $ (946 ) $ (15,146 )
Charges (22,477 ) (1,787 ) (24,264 )
Payments 20,352 814 21,166
Adjustment 476 585 1,061
Accrued liability as of June 30, 2009 $ (15,849 ) $ (1,334 ) $ (17,183 )
Adjustments reflect the impact of foreign currency translation. |
| Note 11 - Income Taxes |
Note11 Income Taxes
The following table reflects changes in unrecognized tax benefits for the six-month period ended June30, 2009 (in thousands):
Gross amounts of unrecognized tax benefits as of January 1, 2009 $ 701,374
Increases in unrecognized tax benefits for tax positions taken during the period 73,873
Increases in unrecognized tax benefits for prior period tax positions 11,338
Gross amounts of unrecognized tax benefits as of June 30, 2009 $ 786,585
As of June30, 2009, our liabilities for unrecognized tax benefits were included in deferred and other tax liabilities, net. The total liabilities for unrecognized tax benefits and the increase for the current period of these liabilities relate primarily to the allocations of revenue and costs among our global operations, including $12.2 million related to the acquisition of Gmarket. Over the next 12 months, our existing tax positions will continue to generate an increase in liabilities for unrecognized tax benefits. We recognize interest and/or penalties related to uncertain tax positions in provision for income taxes. The amount of interest and penalties accrued at June30, 2009 was approximately $73.1million.
We are subject to taxation in the U.S.and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2007 tax years. The material jurisdictions in which we are subject to potential examination by tax authorities for tax years after 2002 include, among others, the U.S., California, France, Germany, Italy, Korea, Switzerland and Singapore. |
