UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _______ to _______
Commission file number 001-37713
eBay Inc.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code:
(408) 376-7108
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of exchange on which registered | ||||||
| Common stock | EBAY | The Nasdaq Global Select Market | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2022, there were 542,659,087 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.
eBay Inc.
TABLE OF CONTENTS
| Page | ||||||||
| PART I: FINANCIAL INFORMATION | ||||||||
| PART II: OTHER INFORMATION | ||||||||
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Index
| Page | |||||
3
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In millions, except par value) | |||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,037 | $ | 1,379 | |||||||
| Short-term investments | 1,457 | 5,944 | |||||||||
| Customer accounts and funds receivable | 633 | 681 | |||||||||
| Other current assets | 1,162 | 1,107 | |||||||||
| Total current assets | 5,289 | 9,111 | |||||||||
| Long-term investments | 1,971 | 2,575 | |||||||||
| Property and equipment, net | 1,194 | 1,236 | |||||||||
| Goodwill | 4,058 | 4,178 | |||||||||
| Operating lease right-of-use assets | 527 | 289 | |||||||||
| Deferred tax assets | 3,144 | 3,255 | |||||||||
| Equity investment in Adevinta | 2,417 | 5,391 | |||||||||
| Other assets | 497 | 591 | |||||||||
| Total assets | $ | 19,097 | $ | 26,626 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | 1,150 | $ | 1,355 | |||||||
| Accounts payable | 224 | 262 | |||||||||
| Customer accounts and funds payable | 649 | 707 | |||||||||
| Accrued expenses and other current liabilities | 1,765 | 1,927 | |||||||||
| Income taxes payable | 186 | 371 | |||||||||
| Total current liabilities | 3,974 | 4,622 | |||||||||
| Operating lease liabilities | 432 | 200 | |||||||||
| Deferred tax liabilities | 2,231 | 3,116 | |||||||||
| Long-term debt | 6,579 | 7,727 | |||||||||
| Other liabilities | 1,028 | 1,183 | |||||||||
| Total liabilities | 14,244 | 16,848 | |||||||||
| Commitments and Contingencies (Note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.001 par value; 3,580 shares authorized; 544 and 594 shares outstanding | 2 | 2 | |||||||||
| Additional paid-in capital | 17,147 | 16,659 | |||||||||
Treasury stock at cost, 1,178 and 1,121 shares | (46,402) | (43,371) | |||||||||
| Retained earnings | 33,766 | 36,090 | |||||||||
| Accumulated other comprehensive income | 340 | 398 | |||||||||
| Total stockholders’ equity | 4,853 | 9,778 | |||||||||
| Total liabilities and stockholders’ equity | $ | 19,097 | $ | 26,626 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Net revenues | $ | 2,380 | $ | 2,501 | $ | 7,285 | $ | 7,807 | |||||||||||||||
| Cost of net revenues | 647 | 678 | 1,999 | 1,956 | |||||||||||||||||||
| Gross profit | 1,733 | 1,823 | 5,286 | 5,851 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 538 | 496 | 1,582 | 1,601 | |||||||||||||||||||
| Product development | 345 | 334 | 990 | 988 | |||||||||||||||||||
| General and administrative | 212 | 219 | 675 | 715 | |||||||||||||||||||
| Provision for transaction losses | 69 | 112 | 251 | 303 | |||||||||||||||||||
| Amortization of acquired intangible assets | 1 | — | 3 | 9 | |||||||||||||||||||
| Total operating expenses | 1,165 | 1,161 | 3,501 | 3,616 | |||||||||||||||||||
| Income from operations | 568 | 662 | 1,785 | 2,235 | |||||||||||||||||||
| Gain (loss) on equity investments and warrant, net | (593) | (181) | (4,105) | (490) | |||||||||||||||||||
| Interest and other, net | (29) | (47) | (110) | (186) | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes | (54) | 434 | (2,430) | 1,559 | |||||||||||||||||||
| Income tax benefit (provision) | (16) | (151) | 485 | (414) | |||||||||||||||||||
| Income (loss) from continuing operations | (70) | 283 | (1,945) | 1,145 | |||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | 1 | (19) | 4 | 10,494 | |||||||||||||||||||
| Net income (loss) | $ | (69) | $ | 264 | $ | (1,941) | $ | 11,639 | |||||||||||||||
| Income (loss) per share - basic: | |||||||||||||||||||||||
| Continuing operations | $ | (0.13) | $ | 0.44 | $ | (3.45) | $ | 1.72 | |||||||||||||||
| Discontinued operations | 0.00 | (0.03) | 0.01 | 15.72 | |||||||||||||||||||
| Net income (loss) per share - basic | $ | (0.13) | $ | 0.41 | $ | (3.44) | $ | 17.44 | |||||||||||||||
| Income (loss) per share - diluted: | |||||||||||||||||||||||
| Continuing operations | $ | (0.13) | $ | 0.43 | $ | (3.45) | $ | 1.69 | |||||||||||||||
| Discontinued operations | 0.00 | (0.03) | 0.01 | 15.47 | |||||||||||||||||||
| Net income (loss) per share - diluted | $ | (0.13) | $ | 0.40 | $ | (3.44) | $ | 17.16 | |||||||||||||||
| Weighted-average shares: | |||||||||||||||||||||||
| Basic | 548 | 647 | 563 | 667 | |||||||||||||||||||
| Diluted | 548 | 658 | 563 | 678 | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Net income (loss) | $ | (69) | $ | 264 | $ | (1,941) | $ | 11,639 | |||||||||||||||
| Other comprehensive income (loss), net of reclassification adjustments: | |||||||||||||||||||||||
| Foreign currency translation gains (losses) | (77) | (85) | (196) | (192) | |||||||||||||||||||
| Unrealized gains (losses) on investments, net | (31) | — | (99) | (4) | |||||||||||||||||||
| Tax benefit (expense) on unrealized gains (losses) on investments, net | 7 | — | 22 | 1 | |||||||||||||||||||
| Unrealized gains (losses) on hedging activities, net | 151 | 60 | 275 | 130 | |||||||||||||||||||
| Tax benefit (expense) on unrealized gains (losses) on hedging activities, net | (33) | (13) | (60) | (29) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | 17 | (38) | (58) | (94) | |||||||||||||||||||
| Comprehensive income (loss) | $ | (52) | $ | 226 | $ | (1,999) | $ | 11,545 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Common stock: | |||||||||||||||||||||||
| Balance, beginning of period | $ | 2 | $ | 2 | $ | 2 | $ | 2 | |||||||||||||||
| Common stock issued | — | — | — | — | |||||||||||||||||||
| Common stock repurchased | — | — | — | — | |||||||||||||||||||
| Balance, end of period | 2 | 2 | 2 | 2 | |||||||||||||||||||
| Additional paid-in-capital: | |||||||||||||||||||||||
| Balance, beginning of period | 17,059 | 16,676 | 16,659 | 16,497 | |||||||||||||||||||
| Common stock and stock-based awards issued | — | 1 | 55 | 59 | |||||||||||||||||||
| Tax withholdings related to net share settlements of restricted stock units and awards | (32) | (58) | (130) | (186) | |||||||||||||||||||
| Stock-based compensation | 118 | 130 | 366 | 386 | |||||||||||||||||||
| Forward contract for share repurchases | — | — | 188 | — | |||||||||||||||||||
| Other | 2 | 1 | 9 | (6) | |||||||||||||||||||
| Balance, end of period | 17,147 | 16,750 | 17,147 | 16,750 | |||||||||||||||||||
| Treasury stock at cost: | |||||||||||||||||||||||
| Balance, beginning of period | (46,101) | (38,308) | (43,371) | (36,515) | |||||||||||||||||||
| Common stock repurchased | (301) | (2,251) | (3,031) | (4,044) | |||||||||||||||||||
| Balance, end of period | (46,402) | (40,559) | (46,402) | (40,559) | |||||||||||||||||||
| Retained earnings: | |||||||||||||||||||||||
| Balance, beginning of period | 33,960 | 34,086 | 36,090 | 22,961 | |||||||||||||||||||
| Net income (loss) | (69) | 264 | (1,941) | 11,639 | |||||||||||||||||||
| Dividends and dividend equivalents declared | (125) | (120) | (383) | (370) | |||||||||||||||||||
| Balance, end of period | 33,766 | 34,230 | 33,766 | 34,230 | |||||||||||||||||||
| Accumulated other comprehensive income: | |||||||||||||||||||||||
| Balance, beginning of period | 323 | 560 | 398 | 616 | |||||||||||||||||||
| Foreign currency translation adjustment | (77) | (85) | (196) | (192) | |||||||||||||||||||
| Change in unrealized gains (losses) on investments | (31) | — | (99) | (4) | |||||||||||||||||||
| Change in unrealized gains (losses) on derivative instruments | 151 | 60 | 275 | 130 | |||||||||||||||||||
| Tax benefit (provision) on above items | (26) | (13) | (38) | (28) | |||||||||||||||||||
| Balance, end of period | 340 | 522 | 340 | 522 | |||||||||||||||||||
| Total stockholders’ equity | $ | 4,853 | $ | 10,945 | $ | 4,853 | $ | 10,945 | |||||||||||||||
| Dividends and dividend equivalents declared per share or restricted stock unit | $ | 0.22 | $ | 0.18 | $ | 0.66 | $ | 0.54 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| (Unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (1,941) | $ | 11,639 | |||||||
| Income (loss) from discontinued operations, net of income taxes | (4) | (10,494) | |||||||||
| Adjustments: | |||||||||||
| Provision for transaction losses | 251 | 303 | |||||||||
| Depreciation and amortization | 335 | 380 | |||||||||
| Stock-based compensation | 366 | 365 | |||||||||
| Loss (gain) on investments and other, net | 7 | (39) | |||||||||
| Deferred income taxes | (807) | 41 | |||||||||
| Change in fair value of warrant | 246 | (383) | |||||||||
| Change in fair value of equity investment in Adevinta | 2,973 | 1,497 | |||||||||
| Change in fair value of equity investment in Gmarket | 299 | — | |||||||||
| Unrealized change in fair value of equity investment in KakaoBank | 246 | (512) | |||||||||
| Unrealized change in fair value of equity investment in Adyen | 118 | — | |||||||||
| Realized change in fair value of shares sold in Adyen | 143 | — | |||||||||
| Realized change in fair value of shares sold in KakaoBank | 75 | (83) | |||||||||
| Loss (gain) on extinguishment of debt | — | 10 | |||||||||
| Changes in assets and liabilities, net of acquisition effects | (366) | (106) | |||||||||
| Net cash provided by continuing operating activities | 1,941 | 2,618 | |||||||||
| Net cash used in discontinued operating activities | (371) | (254) | |||||||||
| Net cash provided by operating activities | 1,570 | 2,364 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (296) | (341) | |||||||||
| Purchases of investments | (15,223) | (15,103) | |||||||||
| Maturities and sales of investments | 18,247 | 13,752 | |||||||||
| Proceeds from the sale of shares in Adyen | 800 | — | |||||||||
| Proceeds from the sale of shares in KakaoBank | 287 | 114 | |||||||||
| Other | (62) | 13 | |||||||||
| Net cash provided by (used in) continuing investing activities | 3,753 | (1,565) | |||||||||
| Net cash provided by discontinued investing activities | 2 | 2,443 | |||||||||
| Net cash provided by investing activities | 3,755 | 878 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock | 55 | 57 | |||||||||
| Repurchases of common stock | (2,828) | (3,966) | |||||||||
| Payments for taxes related to net share settlements of restricted stock units and awards | (130) | (186) | |||||||||
| Payments for dividends | (370) | (359) | |||||||||
| Proceeds from issuance of long-term debt, net | — | 2,478 | |||||||||
| Repayment of debt | (1,355) | (1,156) | |||||||||
| Net funds receivable and payable activity | 92 | (109) | |||||||||
| Other | — | (6) | |||||||||
| Net cash used in continuing financing activities | (4,536) | (3,247) | |||||||||
| Net cash provided by discontinued financing activities | — | 2 | |||||||||
| Net cash used in financing activities | (4,536) | (3,245) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (89) | 30 | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 700 | 27 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,406 | 1,594 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 2,106 | $ | 1,621 | |||||||
| Less: Cash, cash equivalents and restricted cash of discontinued operations | — | 352 | |||||||||
| Cash, cash equivalents and restricted cash of continuing operations at end of period | $ | 2,106 | $ | 1,269 | |||||||
8
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| (Unaudited) | |||||||||||
| Supplemental cash flow disclosures: | |||||||||||
| Cash paid for: | |||||||||||
| Interest | $ | 194 | $ | 203 | |||||||
| Income taxes | $ | 456 | $ | 435 | |||||||
| Non-cash investing activities: | |||||||||||
| Equity investment in Adevinta | $ | — | $ | 10,776 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
Note 1 — The Company and Summary of Significant Accounting Policies
The Company
eBay Inc. is a global commerce leader, which includes our Marketplace platforms. Founded in 1995 in San Jose, California, eBay is one of the world’s largest and most vibrant marketplaces for discovering great value and unique selection. Collectively, we connect millions of buyers and sellers around the world, empowering people and creating opportunity for all. Our technologies and services are designed to give buyers choice and a breadth of relevant inventory and to enable sellers worldwide to organize and offer their inventory for sale, virtually anytime and anywhere.
When we refer to “we,” “our,” “us,” the “Company” or “eBay” in this Quarterly Report on Form 10-Q, we mean the current Delaware corporation (eBay Inc.) and its 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, investments including level 3 investments in Gmarket, warrants and the recoverability of goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Principles of Consolidation and Basis of Presentation
The accompanying condensed financial statements are consolidated and include the financial statements of eBay Inc., 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 VIE’s. Equity investments in entities where we have not elected the fair value option and where we hold at least a 20% ownership interest or 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 gain (loss) on equity investments and warrant, net and our equity investment balance is included in long-term investments. Equity investments in entities where we hold less than a 20% ownership interest are generally accounted for as equity investments to be measured at fair value or, under an election, at cost if it does not have readily determinable fair value, in which case the carrying value would be adjusted upon the occurrence of an observable price change in an orderly transaction for identical or similar instruments or impairment.
Upon the transfer of our Classifieds business to Adevinta ASA (“Adevinta”) on June 24, 2021, shares in Adevinta were included as part of total consideration received under the definitive agreement. The equity interest in Adevinta is accounted for under the fair value option. As of September 30, 2022, our ownership in Adevinta was 33%. Subsequent changes in fair value are included in gain (loss) on equity investments and warrant, net.
Additionally, upon completion of the sale of 80.01% of the outstanding equity interests of eBay Korea LLC, a limited liability company incorporated under the laws of Korea and a wholly owned subsidiary of eBay KTA (“eBay Korea”) to E-mart Inc. and one of its wholly owned subsidiaries (together, “Emart”) on November 14, 2021, we retained 19.99% of the outstanding equity interests of the new entity, Gmarket Global LLC (“Gmarket”) formerly known as Apollo Korea, which is accounted for under the fair value option. Subsequent changes in fair value are included in gain (loss) on equity investments and warrant, net and our equity investment balance is included in long-term investments.
10
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, 2021. 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 the fair statement of the condensed consolidated financial position, results of operations and cash flows for these interim periods.
Significant Accounting Policies
There were no significant changes to our significant accounting policies disclosed in “Note 1 — The Company and Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements Not Yet Adopted
In March 2022, the FASB issued new guidance to expand the scope of financial assets that can be included in a closed portfolio hedged using the portfolio layer method to allow consistent accounting for similar hedges. The expanded scope permits the application of the same portfolio hedging method to both prepayable and nonprepayable financial assets. The standard will be effective for annual reporting periods beginning after December 15, 2022, including interim reporting periods within those fiscal years. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In June 2022, the Financial Accounting Standards Board (“FASB”) issued new guidance to clarify the fair value measurement guidance for equity securities subject to contractual restrictions that prohibit the sale of an equity security. Further, the guidance introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The standard will be effective for annual reporting periods beginning after December 15, 2023, including interim reporting periods within those fiscal years. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
11
Note 2 — Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) 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 (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares.
The following table presents the computation of basic and diluted net income (loss) per share for the periods indicated (in millions, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Income (loss) from continuing operations | $ | (70) | $ | 283 | $ | (1,945) | $ | 1,145 | |||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | 1 | (19) | 4 | 10,494 | |||||||||||||||||||
| Net income (loss) | $ | (69) | $ | 264 | $ | (1,941) | $ | 11,639 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares of common stock - basic | 548 | 647 | 563 | 667 | |||||||||||||||||||
| Dilutive effect of equity incentive awards | — | 11 | — | 11 | |||||||||||||||||||
| Weighted average shares of common stock - diluted | 548 | 658 | 563 | 678 | |||||||||||||||||||
| Income (loss) per share - basic: | |||||||||||||||||||||||
| Continuing operations | $ | (0.13) | $ | 0.44 | $ | (3.45) | $ | 1.72 | |||||||||||||||
| Discontinued operations | 0.00 | (0.03) | 0.01 | 15.72 | |||||||||||||||||||
| Net income (loss) per share - basic | $ | (0.13) | $ | 0.41 | $ | (3.44) | $ | 17.44 | |||||||||||||||
| Income (loss) per share - diluted: | |||||||||||||||||||||||
| Continuing operations | $ | (0.13) | $ | 0.43 | $ | (3.45) | $ | 1.69 | |||||||||||||||
| Discontinued operations | 0.00 | (0.03) | 0.01 | 15.47 | |||||||||||||||||||
| Net income (loss) per share - diluted | $ | (0.13) | $ | 0.40 | $ | (3.44) | $ | 17.16 | |||||||||||||||
| Common stock equivalents excluded from income (loss) per diluted share because their effect would have been anti-dilutive | 15 | — | 14 | 9 | |||||||||||||||||||
12
Note 3 — Discontinued Operations
Classifieds
On June 24, 2021, we completed the previously announced transfer of our Classifieds business to Adevinta for $2.5 billion in cash, subject to certain adjustments, and approximately 540 million shares in Adevinta which represented an equity interest of 44%. Together, the total consideration received under the definitive agreement was valued at approximately $13.3 billion, based on the closing trading price of Adevinta’s outstanding shares at the Oslo Stock Exchange on June 24, 2021. The transfer resulted in a pre-tax gain of $12.5 billion and related income tax expense of $2.1 billion, both within income from discontinued operations. The results of our Classifieds business have been presented as discontinued operations in our consolidated statement of income for all periods presented through June 24, 2021 as the transfer represented a strategic shift in our business that had a major effect on our operations and financial results.
In addition, upon closing we entered into a transition service agreement (“TSA”) with Adevinta to support the operations of Classifieds after the divestiture for fees of $29 million. This agreement terminated during the second quarter of 2022.
eBay Korea
On November 14, 2021, we completed the previously announced sale of 80.01% of the outstanding equity interests of eBay Korea to Emart, pursuant to the terms and conditions of the securities purchase agreement, in exchange for approximately $3.0 billion of gross cash proceeds as of the transaction close date, subject to certain adjustments. The sale resulted in a pre-tax gain of $3.2 billion inclusive of a $81 million currency translation adjustment and a $44 million gain on the net investment hedge settled in the fourth quarter of 2021, as well as income tax expense of $369 million. The results of our eBay Korea business have been presented as discontinued operations in our condensed consolidated statement of income for all periods presented through November 14, 2021 as the transfer represented a strategic shift in our business that had a major effect on our operations and financial results.
In addition, upon closing we entered into a transition service agreement with eBay Korea to support the operations of eBay Korea after the divestiture for immaterial fees. This agreement commenced with the close of the transaction and is currently expected to terminate during the fourth quarter of 2022.
Discontinued operations
The following table presents financial results from discontinued operations, net of income taxes in our condensed consolidated statement of income for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 (1) | ||||||||||||||||||||
| Classifieds income from discontinued operations, net of income taxes | $ | — | $ | (18) | $ | 5 | $ | 10,482 | |||||||||||||||
| eBay Korea income (loss) from discontinued operations, net of income taxes | 1 | (1) | (1) | 3 | |||||||||||||||||||
StubHub income from discontinued operations, net of income taxes | — | — | — | 9 | |||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | $ | 1 | $ | (19) | $ | 4 | $ | 10,494 | |||||||||||||||
(1) Includes Classifieds financial results through the transaction close on June 24, 2021 and includes the gain on sale recorded for the Classifieds transaction.
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The following table presents cash flows for discontinued operations for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 (1) | ||||||||||||||||||||
Classifieds net cash used in discontinued operating activities | $ | — | $ | (428) | $ | (1) | $ | (283) | |||||||||||||||
eBay Korea and other disposal activity net cash provided by (used in) discontinued operating activities | (6) | 22 | (370) | 29 | |||||||||||||||||||
| Net cash used in discontinued operating activities | $ | (6) | $ | (406) | $ | (371) | $ | (254) | |||||||||||||||
Classifieds net cash provided by discontinued investing activities | $ | — | $ | — | $ | — | $ | 2,453 | |||||||||||||||
eBay Korea and other disposal activity net cash provided by (used in) discontinued investing activities | 2 | (1) | 2 | (10) | |||||||||||||||||||
| Net cash provided by (used in) discontinued investing activities | $ | 2 | $ | (1) | $ | 2 | $ | 2,443 | |||||||||||||||
eBay Korea and other disposal activity net cash provided by discontinued financing activities | $ | — | $ | 64 | $ | — | $ | 2 | |||||||||||||||
| Net cash provided by discontinued financing activities | $ | — | $ | 64 | $ | — | $ | 2 | |||||||||||||||
(1) Includes Classifieds financial results through the transaction close on June 24, 2021 and includes the gain on sale recorded for the Classifieds transaction.
During the nine months ended September 30, 2022, we paid income taxes of $348 million related to discontinued operating activities of eBay Korea.
Classifieds
The financial results of Classifieds were presented as income (loss) from discontinued operations, net of income taxes on our condensed consolidated statement of income through June 24, 2021, when the transfer of Classifieds was completed. The periods presented below include the impact of intercompany revenue agreements through June 24, 2021. The impact of these intercompany revenue agreements to net revenues and cost of net revenues was $5 million for the nine months ended September 30, 2021. The continuing revenue and cash flows are not considered to be material.
The following table presents the financial results of Classifieds for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 (1) | ||||||||||||||||||||
| Net revenues | $ | — | $ | — | $ | — | $ | 565 | |||||||||||||||
| Cost of net revenues | — | — | — | 63 | |||||||||||||||||||
| Gross profit | — | — | — | 502 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | — | — | — | 183 | |||||||||||||||||||
| Product development | — | — | — | 105 | |||||||||||||||||||
| General and administrative | — | 9 | (7) | 76 | |||||||||||||||||||
| Provision for transaction losses | — | — | — | 2 | |||||||||||||||||||
| Total operating expenses | — | 9 | (7) | 366 | |||||||||||||||||||
| Income (loss) from operations of discontinued operations | — | (9) | 7 | 136 | |||||||||||||||||||
| Pre-tax gain on sale | — | — | — | 12,524 | |||||||||||||||||||
| Income (loss) from discontinued operations before income taxes | — | (9) | 7 | 12,660 | |||||||||||||||||||
| Income tax provision | — | (9) | (2) | (2,178) | |||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | $ | — | $ | (18) | $ | 5 | $ | 10,482 | |||||||||||||||
(1) Includes Classifieds financial results through the transaction close on June 24, 2021 and includes the gain on sale recorded for the Classifieds transaction.
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eBay Korea
The financial results of eBay Korea were presented as income (loss) from discontinued operations, net of income taxes on our condensed consolidated statement of income through November 14, 2021, when the sale of eBay Korea was completed. The following table presents the financial results of eBay Korea for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues | $ | — | $ | 374 | $ | — | $ | 1,157 | |||||||||||||||
| Cost of net revenues | — | 217 | — | 663 | |||||||||||||||||||
| Gross profit | — | 157 | — | 494 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | — | 136 | — | 418 | |||||||||||||||||||
| Product development | — | 14 | — | 43 | |||||||||||||||||||
| General and administrative | — | 8 | 2 | 29 | |||||||||||||||||||
| Total operating expenses | — | 158 | 2 | 490 | |||||||||||||||||||
| Income (loss) from operations of discontinued operations | — | (1) | (2) | 4 | |||||||||||||||||||
| Interest and other, net | 1 | 1 | 1 | 2 | |||||||||||||||||||
| Income (loss) from discontinued operations before income taxes | 1 | — | (1) | 6 | |||||||||||||||||||
| Income tax benefit (provision) | — | (1) | — | (3) | |||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | $ | 1 | $ | (1) | $ | (1) | $ | 3 | |||||||||||||||
StubHub, PayPal and Enterprise
For the three and nine months ended September 30, 2022 and 2021, the discontinued operations activity related to our former StubHub, PayPal and Enterprise businesses was immaterial.
15
Note 4 — Goodwill and Intangible Assets
Goodwill
The following table presents goodwill activity for the period indicated (in millions):
| December 31, 2021 | Goodwill Acquired | Adjustments | September 30, 2022 | ||||||||||||||||||||
| Goodwill | $ | 4,178 | $ | 51 | $ | (171) | $ | 4,058 | |||||||||||||||
The adjustments to goodwill during the nine months ended September 30, 2022 were primarily due to foreign currency translation.
Intangible Assets
Intangible assets are reported within other assets in our condensed consolidated balance sheet. The following table presents components of identifiable intangible assets as of the dates indicated (in millions, except years):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||||||||||||||||
| Intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Customer lists and user base | $ | 183 | $ | (183) | $ | — | 0 | $ | 203 | $ | (203) | $ | — | 0 | |||||||||||||||||||||||||||||||||
| Marketing related | 55 | (52) | 3 | 2 | 57 | (52) | 5 | 2 | |||||||||||||||||||||||||||||||||||||||
| Developed technologies | 186 | (173) | 13 | 3 | 174 | (174) | — | 3 | |||||||||||||||||||||||||||||||||||||||
| All other | 159 | (157) | 2 | 0 | 159 | (156) | 3 | 0 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 583 | $ | (565) | $ | 18 | $ | 593 | $ | (585) | $ | 8 | |||||||||||||||||||||||||||||||||||
Amortization expense for intangible assets was $2 million and immaterial for the three months ended September 30, 2022 and 2021, respectively, and $4 million and $9 million for the nine months ended September 30, 2022 and 2021, respectively.
The following table presents expected future intangible asset amortization as of the date indicated (in millions):
| September 30, 2022 | ||||||||
| Remaining 2022 | $ | 2 | ||||||
| 2023 | 7 | |||||||
| 2024 | 6 | |||||||
| 2025 | 3 | |||||||
| Total | $ | 18 | ||||||
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Acquisition of TCGplayer
On August 22, 2022, eBay and TCGplayer announced that we entered into an agreement for eBay to acquire TCGplayer and on October 31, 2022, we completed this acquisition for up to approximately $295 million in cash. TCGplayer is a trusted marketplace for collectible card game enthusiasts, making it easy to buy and sell collections of collectibles from one marketplace.
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Note 5 — Segments
We have one operating and reportable segment. Our reportable segment is Marketplace, which includes our online marketplace located at www.ebay.com, its localized counterparts and the eBay suite of mobile apps. Our management and our chief operating decision maker review financial information presented on a consolidated basis for purposes of allocating resources and evaluating performance and do not evaluate using asset information. The accounting policies of our segment are the same as those described in “Note 1 — The Company and Summary of Significant Accounting Policies.”
The following table summarizes net revenues by type for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues by type: | |||||||||||||||||||||||
| Net transaction revenues | $ | 2,259 | $ | 2,350 | $ | 6,911 | $ | 7,322 | |||||||||||||||
| Marketing services and other revenues | 121 | 151 | 374 | 485 | |||||||||||||||||||
| Total net revenues | $ | 2,380 | $ | 2,501 | $ | 7,285 | $ | 7,807 | |||||||||||||||
The following table summarizes the allocation of net revenues based on geography for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| U.S. | $ | 1,187 | $ | 1,198 | $ | 3,612 | $ | 3,798 | |||||||||||||||
| United Kingdom | 378 | 450 | 1,206 | 1,451 | |||||||||||||||||||
| Germany | 240 | 272 | 772 | 953 | |||||||||||||||||||
| Rest of world | 575 | 581 | 1,695 | 1,605 | |||||||||||||||||||
| Total net revenues | $ | 2,380 | $ | 2,501 | $ | 7,285 | $ | 7,807 | |||||||||||||||
Net revenues, inclusive of the effects of foreign exchange during each period, are attributed to U.S. and international geographies primarily based upon the country in which the seller, platform that displays advertising, other service provider or customer, as the case may be, is located.
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Note 6 — Investments
The following tables summarize the unrealized gains and losses and estimated fair value of our investments classified as available-for-sale debt securities and restricted cash as of the dates indicated (in millions):
| September 30, 2022 | |||||||||||||||||||||||
| Gross Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Restricted cash | $ | 28 | $ | — | $ | — | $ | 28 | |||||||||||||||
| Corporate debt securities | 1,338 | — | (3) | 1,335 | |||||||||||||||||||
| Government and agency securities | 19 | — | (1) | 18 | |||||||||||||||||||
| $ | 1,385 | $ | — | $ | (4) | $ | 1,381 | ||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Restricted cash | $ | 2 | $ | — | $ | — | $ | 2 | |||||||||||||||
| Corporate debt securities | 766 | — | (46) | 720 | |||||||||||||||||||
| Government and agency securities | 726 | — | (56) | 670 | |||||||||||||||||||
| $ | 1,494 | $ | — | $ | (102) | $ | 1,392 | ||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Gross Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Restricted cash | $ | 22 | $ | — | $ | — | $ | 22 | |||||||||||||||
| Corporate debt securities | 4,151 | 1 | — | 4,152 | |||||||||||||||||||
| Government and agency securities | 25 | — | — | 25 | |||||||||||||||||||
| $ | 4,198 | $ | 1 | $ | — | $ | 4,199 | ||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Corporate debt securities | $ | 954 | $ | 1 | $ | (5) | $ | 950 | |||||||||||||||
| Government and agency securities | 779 | — | (2) | 777 | |||||||||||||||||||
| $ | 1,733 | $ | 1 | $ | (7) | $ | 1,727 | ||||||||||||||||
We consider cash to be restricted when withdrawal or general use is legally restricted. Restricted cash is held primarily in interest bearing accounts primarily related to our global sabbatical program. Our fixed-income investments consist of predominantly investment grade corporate debt securities and government and agency securities. The corporate debt and government and agency securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies.
The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss. The unrealized losses are due primarily to changes in credit spreads and interest rates. We regularly review investment securities for other-than-temporary impairment using both qualitative and quantitative criteria. Investments classified as available-for-sale debt securities are carried at fair value with changes reflected in other comprehensive income. Where there is an intention or a requirement to sell an impaired available-for-sale debt security, the entire impairment is recognized in earnings with a corresponding adjustment to the amortized cost basis of the security. From time to time, we sell available-for-sale debt securities in an unrealized loss position and recognize an immaterial loss.
19
We regularly review investment securities for credit impairment using both qualitative and quantitative criteria. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses will be recorded through interest and other, net for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. We did not recognize any credit-related impairment through an allowance for credit losses as of September 30, 2022.
Investment securities in a continuous loss position for less than 12 months had an estimated fair value of $2.4 billion and unrealized losses of $92 million as of September 30, 2022, and an estimated fair value of $3.1 billion and an immaterial amount of unrealized losses as of December 31, 2021. Investment securities in a continuous loss position for greater than 12 months had an estimated fair value of $198 million and unrealized losses of $14 million as of September 30, 2022, and there were no investment securities in a continuous loss position for greater than 12 months as of December 31, 2021. Refer to “Note 15 — Accumulated Other Comprehensive Income” for amounts reclassified to earnings from unrealized gains and losses.
The following table presents estimated fair values of our short-term and long-term investments classified as available-for-sale debt securities and restricted cash by date of contractual maturity as of the date indicated (in millions):
| September 30, 2022 | |||||
One year or less (including restricted cash of $28) | $ | 1,381 | |||
One year through two years (including restricted cash of $2) | 568 | ||||
| Two years through three years | 674 | ||||
| Three years through four years | 96 | ||||
| Four years through five years | 54 | ||||
| $ | 2,773 | ||||
Equity Investments
The following table summarizes our equity investments as of the dates indicated (in millions):
| Balance Sheet Location | September 30, 2022 | December 31, 2021 | |||||||||||||||
| Equity investments with readily determinable fair values | Short-term investments | $ | 76 | $ | 1,745 | ||||||||||||
| Equity investment in Adevinta | Equity investment in Adevinta | 2,417 | 5,391 | ||||||||||||||
| Equity investments under the fair value option | Long-term investments | 467 | 725 | ||||||||||||||
| Equity investments without readily determinable fair values | Long-term investments | 79 | 85 | ||||||||||||||
| Equity investments under the equity method of accounting | Long-term investments | 33 | 38 | ||||||||||||||
| Total equity investments | $ | 3,072 | $ | 7,984 | |||||||||||||
Equity investment in Adevinta
We account for equity investments through which we exercise significant influence but do not have control over the investee under the fair value option or under the equity method. Our equity investment in Adevinta is accounted for under the fair value option.
20
Upon completion of the transfer of our Classifieds business to Adevinta on June 24, 2021, we received an equity investment of 44% in Adevinta valued at $10.8 billion at the close of the transfer. On November 18, 2021, we completed the sale of approximately 135 million of our voting shares in Adevinta to Permira, inclusive of the option exercised by Permira to purchase additional voting shares, for total cash consideration of approximately $2.3 billion which reduced our ownership in Adevinta to 33%. Following the close of the share sale in November 2021, our equity investment in Adevinta is reported in the long-term assets section on the condensed consolidated balance sheet to reflect our contractual requirement to retain at least 25% of the total number of issued and outstanding equity securities of Adevinta until October 14, 2023, subject to certain exceptions specified in the agreement.
At the initial recognition of the equity investment, we elected the fair value option where subsequent changes in fair value are recognized in earnings. The investment is classified within Level 1 in the fair value hierarchy as the valuation can be obtained from real time quotes in active markets. The fair value of the equity investment is measured based on Adevinta’s closing stock price and prevailing foreign exchange rate at each balance sheet date and the changes in fair value are reflected in gain (loss) on equity investments and warrant, net in the condensed consolidated statement of income. We believe the fair value option election creates more transparency of the current value in the equity investment in Adevinta. Our non-voting shares are convertible to voting shares on a one-to-one basis, subject to a limitation of 33% voting interest.
For the three months ended September 30, 2022 and 2021, unrealized losses of $501 million and $1,075 million, respectively, were recorded related to the change in fair value of the investment, and for the nine months ended September 30, 2022 and 2021, unrealized losses of $2,973 million and $1,497 million, respectively, were recorded related to the change in fair value of the investment in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income. The fair value of the investment was $2,417 million and $5,391 million as of September 30, 2022 and December 31, 2021, respectively.
Equity investments with readily determinable fair values
Equity investments with readily determinable fair values are classified within Level 1 in the fair value hierarchy as the valuation can be obtained from real time quotes in active markets. Subsequent changes in fair value are reflected in gain (loss) on equity investments and warrant, net in the condensed consolidated statement of income.
In August 2021, one of our equity investments, KakaoBank Corp. (“KakaoBank”), which previously did not have a readily determinable fair value, completed its initial public offering which resulted in this investment having a readily determinable fair value. The fair value of the equity investment is measured based on KakaoBank’s closing stock price and prevailing foreign exchange rate at each balance sheet date. For the three and nine months ended September 30, 2022, unrealized losses of $50 million and $246 million, respectively, were recorded in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income related to the change in fair value of the investment. For both the three and nine months ended September 30, 2021, an unrealized gain of $512 million was recorded in gain (loss) on equity investments and warrant, net related to the change in fair value of the investment. During the nine months ended September 30, 2022, we sold a portion of our shares in KakaoBank for $287 million and recorded realized losses on the change in fair value of shares sold of $75 million in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income. During the nine months ended September 30, 2021, we sold a portion of our shares in KakaoBank for $114 million and recorded a realized gain on the change in fair value of shares sold of $83 million in gain (loss) on equity investments and warrant, net. The fair value of the investment was $76 million and $684 million as of September 30, 2022 and December 31, 2021, respectively and is reported within short-term investments in our condensed consolidated balance sheet.
21
We entered into a warrant agreement in conjunction with a commercial agreement with Adyen that vests in a series of four tranches, at a specified price per share upon meeting processing volume milestone targets on a calendar year basis. When a relevant milestone is reached, the warrant becomes exercisable with respect to the corresponding tranche of warrant shares up until the warrant expiration date of January 31, 2025. In the fourth quarter of 2021, we met the processing volume milestone target to vest the first tranche of the warrant. Upon vesting of the first tranche, we exercised the option to purchase shares of Adyen valued at $1.1 billion in exchange for approximately $110 million in cash. The fair value of the equity investment is measured based on Adyen’s closing stock price and prevailing foreign exchange rate at each balance sheet date.
During the three and nine months ended September 30, 2022, we sold the remainder of our shares in Adyen for $120 million and $800 million, respectively, and recorded realized gains of $24 million and losses of $143 million on the change in fair value of shares sold in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income. As of December 31, 2021, the fair value of the investment was $1,061 million and is reported within short-term investments in our condensed consolidated balance sheet. Refer to “Note 7 — Derivative Instruments” for more information about the warrant.
Equity investments under the fair value option
We account for equity investments through which we exercise significant influence but do not have control over the investee under the fair value option or under the equity method. Our equity investment in Gmarket and certain other immaterial equity investments are accounted for under the fair value option.
On November 14, 2021, we completed the previously announced sale of 80.01% of the outstanding equity interests of eBay Korea to Emart. Upon completion of the sale, we retained 19.99% of the outstanding equity interest of the new entity, Gmarket, over whom we are able to exercise significant influence based on the terms of the securities purchase agreement, including through our board representation. Our equity investment in Gmarket was valued at $728 million as of the transaction close date. At the initial recognition of this equity investment, we elected the fair value option where subsequent changes in fair value are recognized in gain (loss) on equity investments and warrant, net in the condensed consolidated statement of income. We believe the fair value option election creates more transparency of the current value in the equity investment in Gmarket. Our retained investment in Gmarket is subject to a year right held by Emart to purchase the remaining interest at the close price of the sale.
For the three and nine months ended September 30, 2022, unrealized losses of $40 million and $299 million, respectively, were recorded in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income related to the change in fair value of the investment. As of September 30, 2022 and December 31, 2021, the fair value of the investment was $426 million and $725 million, respectively and is reported within long-term investments in our condensed consolidated balance sheet.
The investment is classified as Level 3 in the fair value hierarchy as the valuation reflects management’s estimate of assumptions that market participants would use in pricing the equity investment. Certain other immaterial equity investments aggregating to $41 million as of September 30, 2022 are measured at fair value using the net asset value per share (or its equivalent) practical expedient, and have not been classified in the fair value hierarchy. Refer to “Note 8 — Fair Value Measurement of Assets and Liabilities” for more information.
Other equity method investments
We account for equity investments through which we exercise significant influence but do not have control over the investee under the fair value option or under the equity method. For equity investments accounted for under the equity method, our consolidated results of operations include, as a component of gain (loss) on equity investments and warrant, net, our share of the net income or loss of the equity investments accounted for under the equity method of accounting.
22
Equity investments without readily determinable fair values
The following table summarizes the change in total carrying value related to equity investments without readily determinable fair values still held for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Carrying value, beginning of period | $ | 76 | $ | 571 | $ | 85 | $ | 539 | |||||||||||||||
| Additions | 5 | — | 5 | 1 | |||||||||||||||||||
| Upward adjustments for observable price changes | — | — | — | 41 | |||||||||||||||||||
| Downward adjustments for observable price changes and impairment | — | (10) | (7) | (10) | |||||||||||||||||||
| Transfers out from investments without readily determinable fair values | — | (312) | — | (312) | |||||||||||||||||||
| Foreign currency translation and other | (2) | (6) | (4) | (16) | |||||||||||||||||||
| Carrying value, end of period | $ | 79 | $ | 243 | $ | 79 | $ | 243 | |||||||||||||||
For the nine months ended September 30, 2022, we recorded downward adjustments $7 million to the carrying value of a strategic investment in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income.
For such equity investments without readily determinable fair values still held at September 30, 2022, the cumulative upward adjustment for observable price changes was $41 million and cumulative downward adjustment for observable price changes and impairments was $298 million.
The following table summarizes unrealized gains and losses related to equity investments held at September 30, 2022 and presented within gain (loss) on equity investments and warrant, net for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net gains/(losses) recognized during the period on equity investments | $ | (566) | $ | (492) | $ | (3,859) | $ | (873) | |||||||||||||||
| Less: Net gains/(losses) recognized during the period on equity investments sold during the period | 24 | 83 | (218) | 83 | |||||||||||||||||||
Total unrealized gains/(losses) on equity investments held at September 30, 2022 | $ | (590) | $ | (575) | $ | (3,641) | $ | (956) | |||||||||||||||
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Note 7 — 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. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate and interest rate movements. We do not use any of our derivative instruments for trading purposes.
We use foreign currency exchange contracts to reduce the volatility of cash flows related to forecasted revenues, expenses, assets and liabilities, including intercompany balances denominated in foreign currencies. These contracts are generally one month to one year in duration but with maturities up to 24 months. The objective of the foreign exchange contracts is to 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. We evaluate the effectiveness of our foreign exchange contracts designated as cash flow or net investment hedges on a quarterly basis.
In the second quarter of 2022, we began to hedge the variability of forecasted interest payments on anticipated debt issuance using forward-starting interest rate swaps. The total notional amount of these forward-starting interest rate swaps was $250 million as of September 30, 2022 with terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. These interest rate swaps effectively fix the benchmark interest rate and have the economic effect of hedging the variability of forecasted interest payments for up to 10 years on an anticipated debt issuance by the first quarter of 2023, and they will be terminated upon issuance of the debt.
Additionally in 2020, we began to hedge the variability of forecasted interest payments on anticipated debt issuance using forward-starting interest rate swaps and recorded changes in the fair value of these interest rate swaps in AOCI until the anticipated debt issuance. In May 2021, we issued $2.5 billion of senior unsecured notes, which consisted of notes maturing in 2026, 2031 and 2051. As a result, we terminated the interest rate swaps and the gain associated with the termination of approximately $45 million is amortized to interest expense over the terms of our notes due in May 2026 and May 2031.
Similar to other cash flow hedges, we record changes in the fair value of these interest rate swaps in accumulated other comprehensive income (loss) (“AOCI”) until the anticipated debt issuance. Upon debt issuance and termination of the derivative instruments, their fair value will be amortized over the term of the new debt to interest expense. We evaluate the effectiveness of interest rate swaps designated as cash flow hedges on a quarterly basis.
During 2020, we began to hedge the variability of the cash flows in interest payments associated with our floating-rate debt using interest rate swaps. These interest rate swap agreements effectively convert our floating-rate debt that is based on London Interbank Offered Rate (“LIBOR”) to a fixed-rate basis, reducing the impact of interest-rate changes on future interest expense. The total notional amount of these interest rate swaps was $650 million as of September 30, 2022 with terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. Our interest rate swap contracts have maturity dates in 2023. Similar to other cash flow hedges, we record changes in the fair value of these interest rate swaps in AOCI and their fair value is amortized over the term of the debt to interest expense.
Cash Flow Hedges
For derivative instruments that are designated as cash flow hedges, the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings in the same period the forecasted hedged transaction affects earnings. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Unrealized gains and losses in AOCI associated with such derivative instruments are immediately reclassified into earnings. As of September 30, 2022, we have estimated that approximately $232 million of net derivative gains related to our foreign exchange cash flow hedges and $12 million net derivative gains related to our interest rate cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months. We classify cash flows related to our cash flow hedges as operating activities in our condensed consolidated statement of cash flows.
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Non-Designated Hedges
Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets or liabilities, including intercompany balances and equity investments denominated in non-functional currencies. The gains and losses on our derivatives not designated as hedging instruments are recorded in interest and other, net, which are offset by the foreign currency gains and losses on the related assets and liabilities that are also recorded in interest and other, net. We classify cash flows related to our non-designated hedging instruments in the same line item as the cash flows of the related assets or liabilities, which is generally within operating activities in our condensed consolidated statement of cash flows. Cash flows related to the settlement of non-designated hedging instruments related to equity investments are classified within investing activities in our condensed consolidated statement of cash flows.
Warrant
We entered into a warrant agreement in conjunction with a commercial agreement with Adyen that, subject to meeting certain conditions, entitles us to acquire a fixed number of shares up to 5% of Adyen’s fully diluted issued and outstanding share capital at a specific date. The warrant has a term of seven years and vests in a series of four tranches, at a specified price per share (fixed for the first two tranches) upon meeting processing volume milestone targets on a calendar year basis. When or if a relevant milestone is reached, the warrant becomes exercisable with respect to the corresponding tranche of warrant shares up until the warrant expiration date of January 31, 2025. The maximum number of tranches that can vest in one calendar year is two.
In 2021, we met the processing volume milestone target to vest the first tranche of the warrant. Upon vesting of the first tranche, we exercised the option to purchase shares of Adyen valued at approximately $1.1 billion in exchange for approximately $110 million in cash. During the three and nine months ended September 30, 2022, we sold the remainder of our shares in Adyen for $120 million and $800 million, respectively, and recorded realized gains of $24 million and losses of $143 million on the change in fair value of shares sold in gain (loss) on equity investments and warrant, net on our condensed consolidated statement of income. Refer to “Note 6 — Investments” for more information about our equity investments.
The warrant is accounted for as a derivative under ASC Topic 815, Derivatives and Hedging. We report the warrant at fair value within warrant asset in our condensed consolidated balance sheets and changes in the fair value of the warrant are recognized in gain (loss) on equity investments and warrant, net in our condensed consolidated statement of income. The day-one value attributable to the other side of the warrant, which was recorded as a deferred credit, is reported within other liabilities in our condensed consolidated balance sheets and is amortized over the life of the commercial arrangement. See “Note 8 — Fair Value Measurements” for information about the fair value measurement of the warrant.
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Fair Value of Derivative Contracts
The following table presents fair values of our outstanding derivative instruments as of the dates indicated (in millions):
| Balance Sheet Location | September 30, 2022 | December 31, 2021 | |||||||||||||||
| Derivative Assets: | |||||||||||||||||
| Foreign exchange contracts designated as cash flow hedges | Other current assets | $ | 215 | $ | 63 | ||||||||||||
| Foreign exchange contracts not designated as hedging instruments | Other current assets | 38 | 22 | ||||||||||||||
| Interest rate contracts designated as cash flow hedges | Other current assets | 23 | — | ||||||||||||||
| Warrant | Other assets | 198 | 444 | ||||||||||||||
| Foreign exchange contracts designated as cash flow hedges | Other assets | 46 | 24 | ||||||||||||||
| Total derivative assets | $ | 520 | $ | 553 | |||||||||||||
| Derivative Liabilities: | |||||||||||||||||
| Foreign exchange contracts designated as cash flow hedges | Other current liabilities | $ | 23 | $ | — | ||||||||||||
| Foreign exchange contracts not designated as hedging instruments | Other current liabilities | 1 | 17 | ||||||||||||||
| Total derivative liabilities | $ | 24 | $ | 17 | |||||||||||||
| Total fair value of derivative instruments | $ | 496 | $ | 536 | |||||||||||||
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 September 30, 2022, the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $23 million, resulting in net derivative assets of $276 million and net derivative liabilities of $1 million. As of September 30, 2022, there was no potential effect of rights of set-off associated with the interest rate contracts, as there were only asset positions of $23 million.
Effect of Derivative Contracts on Accumulated Other Comprehensive Income
The following tables present the activity of derivative instruments designated as cash flow hedges as of September 30, 2022 and December 31, 2021, and the impact of these derivative contracts on AOCI for the periods indicated (in millions):
| December 31, 2021 | Amount of Gain (Loss) Recognized in Other Comprehensive Income | Less: Amount of Gain (Loss) Reclassified From AOCI to Earnings | September 30, 2022 | ||||||||||||||||||||
| Foreign exchange contracts designated as cash flow hedges | $ | 25 | $ | 310 | $ | 50 | $ | 285 | |||||||||||||||
| Interest rate contracts designated as cash flow hedges | 30 | 17 | 4 | 43 | |||||||||||||||||||
Total | $ | 55 | $ | 327 | $ | 54 | $ | 328 | |||||||||||||||
| December 31, 2020 | Amount of Gain (Loss) Recognized in Other Comprehensive Income | Less: Amount of Gain (Loss) Reclassified From AOCI to Earnings | September 30, 2021 | ||||||||||||||||||||
| Foreign exchange contracts designated as cash flow hedges | $ | (95) | $ | 38 | $ | (62) | $ | 5 | |||||||||||||||
| Interest rate contracts designated as cash flow hedges | 10 | 21 | 1 | 30 | |||||||||||||||||||
Total | $ | (85) | $ | 59 | $ | (61) | $ | 35 | |||||||||||||||
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Effect of Derivative Contracts on Condensed Consolidated Statement of Income
The following table summarizes the total gain (loss) recognized in the condensed consolidated statement of income from our foreign exchange derivative contracts by location for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Foreign exchange contracts designated as cash flow hedges recognized in net revenues | $ | 36 | $ | (19) | $ | 51 | $ | (65) | |||||||||||||||
| Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues | (1) | 1 | (1) | 3 | |||||||||||||||||||
| Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net | 16 | 2 | 56 | (4) | |||||||||||||||||||
| Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income | $ | 51 | $ | (16) | $ | 106 | $ | (66) | |||||||||||||||
The following table summarizes the total gain (loss) recognized in the condensed consolidated statement of income from our interest rate derivative contracts by location for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Gain (loss) from interest rate contracts designated as cash flow hedges recognized in interest and other, net | $ | 2 | $ | 1 | $ | 4 | $ | 1 | |||||||||||||||
The following table summarizes the total gain (loss) recognized in the condensed consolidated statement of income due to changes in the fair value of the warrant for the periods indicated (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Gain (loss) attributable to changes in the fair value of warrant recognized in gain (loss) on equity investments and warrant, net | $ | (27) | $ | 311 | $ | (246) | $ | 383 | |||||||||||||||
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 presents the notional amounts of our outstanding derivatives as of the dates indicated (in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Foreign exchange contracts designated as cash flow hedges | $ | 1,790 | $ | 2,066 | |||||||
| Foreign exchange contracts not designated as hedging instruments | 1,547 | 3,159 | |||||||||
| Interest rate contracts designated as cash flow hedges | 650 | 400 | |||||||||
| Total | $ | 3,987 | $ | 5,625 | |||||||
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Credit Risk
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. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions.
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Note 8 — Fair Value Measurement of Assets and Liabilities
The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated (in millions):
| September 30, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 2,037 | $ | 2,037 | $ | — | $ | — | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Restricted cash | 28 | 28 | — | — | |||||||||||||||||||
| Corporate debt securities | 1,335 | — | 1,335 | — | |||||||||||||||||||
| Government and agency securities | 18 | — | 18 | — | |||||||||||||||||||
| Equity investments with readily determinable fair values | 76 | 76 | — | — | |||||||||||||||||||
| Total short-term investments | 1,457 | 104 | 1,353 | — | |||||||||||||||||||
| Equity investment in Adevinta | 2,417 | 2,417 | — | — | |||||||||||||||||||
| Derivatives | 520 | — | 322 | 198 | |||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Restricted cash | 2 | 2 | — | — | |||||||||||||||||||
| Corporate debt securities | 720 | — | 720 | — | |||||||||||||||||||
| Government and agency securities | 670 | — | 670 | — | |||||||||||||||||||
| Equity investment under the fair value option | 467 | — | — | 467 | |||||||||||||||||||
| Total long-term investments | 1,859 | 2 | 1,390 | 467 | |||||||||||||||||||
| Total financial assets | $ | 8,290 | $ | 4,560 | $ | 3,065 | $ | 665 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Derivatives | $ | 24 | $ | — | $ | 24 | $ | — | |||||||||||||||
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| December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,379 | $ | 1,379 | $ | — | $ | — | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Restricted cash | 22 | 22 | — | — | |||||||||||||||||||
| Corporate debt securities | 4,152 | — | 4,152 | — | |||||||||||||||||||
| Government and agency securities | 25 | — | 25 | — | |||||||||||||||||||
| Equity investments with readily determinable fair values | 1,745 | 1,745 | — | — | |||||||||||||||||||
| Total short-term investments | 5,944 | 1,767 | 4,177 | — | |||||||||||||||||||
| Equity investment in Adevinta | 5,391 | 5,391 | — | — | |||||||||||||||||||
| Derivatives | 553 | — | 109 | 444 | |||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Corporate debt securities | 950 | — | 950 | — | |||||||||||||||||||
| Government and agency securities | 777 | — | 777 | — | |||||||||||||||||||
| Equity investment under the fair value option | 725 | — | — | 725 | |||||||||||||||||||
| Total long-term investments | 2,452 | — | 1,727 | 725 | |||||||||||||||||||
| Total financial assets | $ | 15,719 | $ | 8,537 | $ | 6,013 | $ | 1,169 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Derivatives | $ | 17 | $ | — | $ | 17 | $ | — | |||||||||||||||
Our financial assets and liabilities are valued using market prices on both active markets (Level 1), less active markets (Level 2) and little or no market activity (Level 3). 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. Level 3 instrument valuations typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. We did not have any transfers of financial instruments between valuation levels during the three months ended September 30, 2022.
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.
Fair value measurement of derivative instruments
The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. Our warrant, which is accounted for as a derivative instrument, is valued using a Black-Scholes model. Key assumptions used in the valuation include risk-free interest rates; Adyen’s common stock price, equity volatility and common stock outstanding; exercise price; and details specific to the warrant. The value is also probability adjusted for management’s assumptions with respect to vesting of the remaining three tranches which are each subject to meeting processing volume milestone targets. These assumptions and the probability of meeting processing volume milestone targets may have a significant impact on the value of the warrant. Refer to “Note 7 — Derivative Instruments” for further details on our derivative instruments.
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The following table presents a reconciliation of the opening to closing balance of assets measured using significant unobservable inputs (Level 3) as of the dates indicated (in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Opening balance at beginning of period | $ | 444 | $ | 1,051 | |||||||
| Exercise of options under warrant | — | (961) | |||||||||
| Change in fair value | (246) | 354 | |||||||||
| Closing balance at end of period | $ | 198 | $ | 444 | |||||||
The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the warrant as of September 30, 2022 (in millions):
| Fair value | Valuation technique | Unobservable Input (1) | Range (weighted average) | |||||||||||||||||||||||
| Warrant | $ | 198 | Black-Scholes and Monte Carlo | Probability of vesting | 0.0% - 55.0% (49%) | |||||||||||||||||||||
| Equity volatility | (46%) | |||||||||||||||||||||||||
(1) Probability of vesting was weighted by the unadjusted value of the tranches. For volatility, the average represents the arithmetic average of the points within the range and is not weighted by the relative fair value or notional amount.
Fair value measurement of equity investments
Certain of our equity investments are measured at fair value on a recurring basis, including our equity investment in Adevinta, equity investments with readily determinable fair values and equity investments under the fair value option.
Our equity investment in Adevinta is accounted for under the fair value option and classified within Level 1 in the fair value hierarchy as the fair value is measured based on Adevinta’s closing stock price and prevailing foreign exchange rate at each balance sheet date. Our equity investments with readily determinable fair values are also classified within Level 1 in the fair value hierarchy as the valuation can be obtained from real time quotes in active markets.
Our equity investment in Gmarket was initially recognized on November 14, 2021 in connection with the sale of 80.01% of the outstanding equity interests of eBay Korea to Emart. This equity investment is accounted for under the fair value option and its initial valuation of $728 million was based on the sale price of eBay Korea. Our investment in Gmarket is subject to a year right held by Emart from the date of disposal to purchase the remaining interest at or near the close price of the sale.
The following table presents a reconciliation of the opening to closing balance of the equity investment in Gmarket measured using significant unobservable inputs (Level 3) as of the dates indicated (in millions):
| September 30, 2022 | December 31, 2021 (1) | ||||||||||
| Opening balance at beginning of period | $ | 725 | $ | — | |||||||
| Recognition of equity investment | — | 728 | |||||||||
| Change in fair value | (299) | (3) | |||||||||
| Closing balance at end of period | $ | 426 | $ | 725 | |||||||
(1) There were no indicators of a potential material change in fair value of the investment between the date of recognition and December 31, 2021. The fair value of the investment was $725 million as of December 31, 2021 due to foreign currency adjustments.
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This investment is classified within Level 3 in the fair value hierarchy as valuation of the investment reflects management’s estimate of assumptions that market participants would use in pricing the asset. The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the equity investment in Gmarket as of September 30, 2022 that may have a significant impact on the overall valuation (in millions):
| Fair value | Valuation technique | Unobservable Input (1) | Range | |||||||||||||||||||||||
| Equity investment in Gmarket | $ | 426 | Market multiples | Revenue multiple — GPC method | 1.1x — 2.0x | |||||||||||||||||||||
Revenue multiple — GMAC method | 1.3x — 4.1x | |||||||||||||||||||||||||
(1) The primary unobservable inputs used in the fair value measurement of our equity investment in Gmarket under the fair value option, when using the Guideline Public Company (GPC) method and the Guideline Merged and Acquired Company (GMAC) method under the market multiple approach, are the respective revenue multiples. Significant increases (decreases) in the revenue multiples in isolation would result in significantly higher (lower) fair value measurement. The market multiples are derived from respective groups of guideline public companies and guideline merged and acquired companies.
Certain other immaterial equity investments under the fair value option aggregating to $41 million as of September 30, 2022 are measured at fair value using the net asset value per share (or its equivalent) practical expedient, and have not been classified in the fair value hierarchy.
Refer to “Note 6 — Investments” for further details about our equity investments.
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Note 9 — Debt
The following table summarizes the carrying value of our outstanding debt as of the dates indicated (in millions, except percentages):
| Coupon | As of | Effective | As of | Effective | ||||||||||||||||||||||||||||
| Rate | September 30, 2022 | Interest Rate | December 31, 2021 | Interest Rate | ||||||||||||||||||||||||||||
| Long-Term Debt | ||||||||||||||||||||||||||||||||
| Floating Rate Notes: | ||||||||||||||||||||||||||||||||
| Senior notes due 2023 | LIBOR plus 0.87% | $ | 400 | 2.214 | % | $ | 400 | 1.100 | % | |||||||||||||||||||||||
| Fixed Rate Notes: | ||||||||||||||||||||||||||||||||
| Senior notes due 2022 | — | % | — | — | % | 750 | 3.989 | % | ||||||||||||||||||||||||
| Senior notes due 2022 | — | % | — | — | % | 605 | 2.678 | % | ||||||||||||||||||||||||
| Senior notes due 2023 | 2.750 | % | 750 | 3.989 | % | 750 | 2.866 | % | ||||||||||||||||||||||||
| Senior notes due 2024 | 3.450 | % | 750 | 3.531 | % | 750 | 3.531 | % | ||||||||||||||||||||||||
| Senior notes due 2025 | 1.900 | % | 800 | 1.803 | % | 800 | 1.803 | % | ||||||||||||||||||||||||
| Senior notes due 2026 | 1.400 | % | 750 | 1.252 | % | 750 | 1.252 | % | ||||||||||||||||||||||||
| Senior notes due 2027 | 3.600 | % | 850 | 3.689 | % | 850 | 3.689 | % | ||||||||||||||||||||||||
| Senior notes due 2030 | 2.700 | % | 950 | 2.623 | % | 950 | 2.623 | % | ||||||||||||||||||||||||
| Senior notes due 2031 | 2.600 | % | 750 | 2.186 | % | 750 | 2.186 | % | ||||||||||||||||||||||||
| Senior notes due 2042 | 4.000 | % | 750 | 4.114 | % | 750 | 4.114 | % | ||||||||||||||||||||||||
| Senior notes due 2051 | 3.650 | % | 1,000 | 2.517 | % | 1,000 | 2.517 | % | ||||||||||||||||||||||||
| Total senior notes | 7,750 | 9,105 | ||||||||||||||||||||||||||||||
Hedge accounting fair value adjustments (1) | 4 | 7 | ||||||||||||||||||||||||||||||
| Unamortized premium/(discount) and debt issuance costs | (25) | (30) | ||||||||||||||||||||||||||||||
| Less: Current portion of long-term debt | (1,150) | (1,355) | ||||||||||||||||||||||||||||||
| Total long-term debt | 6,579 | 7,727 | ||||||||||||||||||||||||||||||
| Short-Term Debt | ||||||||||||||||||||||||||||||||
| Current portion of long-term debt | 1,150 | 1,355 | ||||||||||||||||||||||||||||||
| Total short-term debt | 1,150 | 1,355 | ||||||||||||||||||||||||||||||
| Total Debt | $ | 7,729 | $ | 9,082 | ||||||||||||||||||||||||||||
(1) Includes the fair value adjustments to debt associated with terminated interest rate swaps which are being recorded as a reduction to interest expense over the remaining term of the related notes.
Senior Notes
During the second quarter of 2022, the company redeemed the $605 million aggregate principal amount of the 2.600% senior notes due 2022. Total cash consideration paid was $605 million, as the redemption price was equal to 100% of the principal amount. In addition, we paid accrued and unpaid interest on the principal amount.
During the first quarter of 2022, the company redeemed the $750 million aggregate principal amount of the 3.800% senior notes due March 2022. Total cash consideration paid was $750 million, as the redemption price was equal to 100% of the principal amount. In addition, we paid accrued and unpaid interest on the principal amount.
None of the floating rate notes are redeemable prior to maturity. 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.
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If a change of control triggering event (as defined in the applicable senior notes) occurs with respect to the floating rate notes due 2023, the 2.750% fixed rate notes due 2023, the 1.900% fixed rate notes due 2025, the 1.400% fixed rate notes due 2026, the 3.600% fixed rate notes due 2027, the 2.700% fixed rate notes due 2030, the 2.600% fixed rate notes due 2031 or the 3.650% fixed rate notes due 2051, 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.
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 with customary grace periods in certain circumstances, including payment defaults and bankruptcy-related defaults.
To help achieve our interest rate risk management objectives, during the second quarter of 2020, we entered into interest rate swap agreements that effectively converted $400 million of our LIBOR-based floating-rate debt to a fixed-rate basis. These swaps were designated as cash flow hedges and have maturity dates in 2023. During the second quarter of 2022, we began to hedge the variability of forecasted interest payments on anticipated debt issuance using forward-starting interest rate swaps. The total notional amount of these forward-starting interest rate swaps was $250 million as of September 30, 2022 and will be terminated upon issuance of the debt.
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 and premium 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, was approximately $54 million and $66 million during the three months ended September 30, 2022 and 2021, respectively, and $169 million and $191 million during the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and December 31, 2021, the estimated fair value of these senior notes, using Level 2 inputs, was approximately $6.7 billion and $9.5 billion, respectively.
Commercial Paper
We have a commercial paper program pursuant to which we may issue commercial paper notes in an aggregate principal amount at maturity of up to $1.5 billion outstanding at any time with maturities of up to 397 days from the date of issue. As of September 30, 2022, there were no commercial paper notes outstanding.
Credit Agreement
In March 2020, we entered into a credit agreement that provides for an unsecured $2 billion five-year credit facility. We may also, subject to the agreement of the applicable lenders, increase commitments under the revolving credit facility by up to $1 billion. Funds borrowed under the credit agreement may be used for working capital, capital expenditures, acquisitions and other general corporate purposes.
As of September 30, 2022, 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 are required to maintain 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, in an aggregate amount of $1.5 billion. As of September 30, 2022, no borrowings were outstanding under our commercial paper program; therefore, $2 billion of borrowing capacity was available for other purposes permitted by the credit agreement, subject to customary conditions to borrowing. The credit agreement includes a covenant limiting our consolidated leverage ratio to no more than 4.0:1.0, subject to, upon the occurrence of a qualified material acquisition, if so elected by us, a step-up to 4.5:1.0 for the four fiscal quarters completed following such qualified material acquisition. The credit agreement includes customary events of default, with corresponding grace periods in certain circumstances, including payment defaults, cross-defaults and bankruptcy-related defaults. In addition, the credit agreement contains customary affirmative and negative covenants, including restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case, subject to customary exceptions. The credit agreement also contains customary representations and warranties.
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We were in compliance with all financial covenants in our outstanding debt instruments during the nine months ended September 30, 2022.
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Note 10 — Supplemental Consolidated Financial Information
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represents amounts invoiced and revenue recognized prior to invoicing when we have satisfied our performance obligation and have the unconditional right to payment. The allowance for doubtful accounts and authorized credits is estimated based upon our assessment of various factors including historical experience, the age of the accounts receivable balances, current economic conditions reasonable and supportable forecasts, and other factors that may affect our customers’ ability to pay. The allowance for doubtful accounts and authorized credits was $43 million and $74 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, we reported an allowance for doubtful accounts of $19 million reflecting a decrease of $23 million, net of write-offs of $38 million for the nine months ended September 30, 2022. As of December 31, 2021, we reported an allowance for doubtful accounts of $42 million.
Deferred revenue consists of fees received related to unsatisfied performance obligations at the end of the period. Due to the generally short-term duration of contracts, the majority of the performance obligations are satisfied in the following reporting period. The amount of revenue recognized for the nine month period ended September 30, 2022 that was included in the deferred revenue balance at the beginning of the period was $37 million. The amount of revenue recognized for the nine month period ended September 30, 2021 that was included in the deferred revenue balance at the beginning of the period was $47 million.
Cash, cash equivalents and restricted cash
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Cash and cash equivalents | $ | 2,037 | |||||||||