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EBay Inc. Reports Strong Second Quarter 2013 Results

Stock-based compensation expense and related employer payroll taxes. This expense consists of expenses for stock options, restricted stock and employee stock purchases. The company excludes stock-based compensation expense from its non-GAAP measures primarily because they are non-cash expenses that management does not believe are reflective of ongoing operating results. The related employer payroll taxes is dependent on the company's stock price and the timing and size of exercises by employees of their stock options and the vesting of their restricted stock, over which management has limited to no control, and as such management does not believe it correlates to the company's operation of the business.

Amortization or impairment of acquired intangible assets, impairment of goodwill, significant gains or losses and transaction expenses from the acquisition or disposal of a business and certain gains or losses on investments. The company incurs amortization or impairment of acquired intangible assets and goodwill in connection with acquisitions and may incur significant gains or losses from the acquisition or disposal of a business and therefore excludes these amounts from its non-GAAP measures. The company also excludes certain gains and losses on investments. In addition, the company's results are also impacted by hedge transactions related to unique movements of cash from significant business acquisitions or dispositions. The company excludes the impact of the accretion of a note receivable associated with the disposal of certain businesses. The company excludes these items because management does not believe they correlate to the ongoing operating results of the company's business.

Restructuring. These charges consist of expenses for employee severance and other exit and disposal costs. The company excludes significant restructuring charges primarily because management does not believe they are reflective of ongoing operating results.

Tax effect of non-GAAP adjustments. This amount is used to present stock-based compensation and the other amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income.

In addition to the non-GAAP measures discussed above, the company also uses free cash flow. Free cash flow represents operating cash flows less purchases of property and equipment. The company considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property, buildings, and equipment, which can then be used to, among other things, invest in the company's business, make strategic acquisitions, and repurchase stock. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the company's cash balance for the period.
eBay Inc.
Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin
  Three Months Ended
June 30,   June 30,
2013 2012

(In millions, except percentages)
GAAP operating income $ 750 $ 695
Stock-based compensation expense and related employer payroll taxes 168 129
Amortization of acquired intangible assets within cost of net revenues 19 19
Amortization of acquired intangible assets within operating expenses 82   84  
Total non-GAAP operating income adjustments 269   232  
Non-GAAP operating income $ 1,019   $ 927  
Non-GAAP operating margin 26.3 % 27.3 %
Reconciliation of GAAP Net Income to Non-GAAP Net Income and
GAAP Effective Tax Rate to Non-GAAP Effective Tax Rate
  Three Months Ended
June 30,   June 30,
2013 2012
(In millions, except per share amounts)
GAAP income before income taxes $ 756 $ 851
GAAP provision for income taxes (116 ) (159 )
GAAP net income $ 640 $ 692
Non-GAAP adjustments to net income:
Non-GAAP operating income adjustments (see table above) 269 232
Accretion of note receivable (5 ) (5 )
Amortization of intangibles of investments 2
Gain on investment (5 )
Gain on divested business (118 )
Tax effect of non-GAAP adjustments (79 ) (71 )
Non-GAAP net income $ 822 $ 730
Diluted net income per share:
GAAP $ 0.49   $ 0.53  
Non-GAAP $ 0.63   $ 0.56  
Shares used in GAAP and non-GAAP diluted net income per-share calculation 1,313   1,309  
GAAP effective tax rate 15 % 19 %
Tax effect of non-GAAP adjustments to net income 4 % 5 %
Non-GAAP effective tax rate 19 % 24 %

Reconciliation of Operating Cash Flow to Free Cash Flow
  Three Months Ended
June 30,   June 30,
2013 2012
(In millions)
Net cash provided by operating activities $ 1,011 $ 768
Less: Purchases of property and equipment (353 ) (357 )
Free cash flow $ 658   $ 411  

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