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This excerpt taken from the EBAY 8-K filed Oct 18, 2006. eBay
Inc.
Unaudited Condensed Consolidated Statements of Income
To supplement the company’s consolidated financial
statements presented in accordance with generally accepted
accounting principles, or GAAP, eBay uses non-GAAP measures of
certain components of financial performance. These non-GAAP
measures include non-GAAP net income, non-GAAP earnings per
diluted share, non-GAAP operating income, non-GAAP operating
margin, non-GAAP effective tax rate, and free cash flows, as
well as GAAP amounts excluding stock-based compensation on
operating income, net income and earnings per share, and the
corresponding percentages of net revenues. eBay also makes
reference to measures of operating income, net income and
earnings per diluted share, which exclude stock-based
compensation in order to allow for a better comparison of
results in the current period to those in prior periods that did
not include FAS 123(R) stock-based compensation.
These non-GAAP measures are not in accordance with, or an
alternative for, measures prepared in accordance with GAAP and
may be different from non-GAAP measures used by other companies.
In addition, these non-GAAP measures are not based on any
comprehensive set of accounting rules or principles. Non-GAAP
measures have limitations in that they do not reflect all of the
amounts associated with eBay’s results of operations as
determined in accordance with GAAP. These measures should only
be used to evaluate eBay’s results of operations in
conjunction with the corresponding GAAP measures.
Reconciliation to the nearest GAAP measure of all non-GAAP
measures included in this press release can be found in the
tables included on pages 6, 7, 9, 10, and 16 of this
press release. For non-GAAP measures that exclude only
stock-based compensation, the reconciliation to GAAP is
presented in narrative form in this release when the non-GAAP
measure is referenced.
These non-GAAP measures are provided to enhance investors’
overall understanding of the company’s current financial
performance and the company’s prospects for the future, and
to provide further information for comparative purposes due to
the adoption of the new accounting standard FAS 123(R).
Specifically, the company believes the non-GAAP measures provide
useful information to both management and investors by excluding
certain expenses, gains and losses, and net purchases of
property and equipment that may not be indicative of its core
operating results and business outlook. In addition, because
eBay has historically reported certain non-GAAP results to
investors, the company believes the inclusion of non-GAAP
measures provides consistency in the company’s financial
reporting.
For its internal budgeting process, and as discussed further
below, eBay’s management uses financial statements that do
not include stock-based compensation expense related to employee
stock options and employee stock purchases, employer payroll
taxes on employee non-qualified stock option gains, amortization
of acquired intangible assets, gain on sale of equity investment
and the income taxes associated with the foregoing. In addition
to the corresponding GAAP measures, eBay’s management also
uses the foregoing non-GAAP measures in reviewing the financial
results of eBay. Note that beginning with Q1-06, eBay’s
financial results include stock-based compensation from the
adoption of the new accounting standard, FAS 123(R).
eBay’s financial results for prior periods have not been
restated for FAS 123(R).
eBay excludes the following items from non-GAAP net income,
non-GAAP earnings per diluted share, non-GAAP operating income,
non-GAAP operating margin, non-GAAP effective tax rate, as well
as GAAP amounts excluding stock-based compensation on operating
income, net income and earnings per share, and the corresponding
percentages of net revenues.:
Stock-based compensation related to stock options and
employee stock purchases. These expenses consist of expenses
for stock options and employee stock purchases under
FAS 123(R). eBay excludes stock-based compensation expenses
from its non-GAAP measures primarily because they are non-cash
expenses that eBay does not believe are reflective of ongoing
operating results and because excluding these amounts allow for
a comparison of the results in the current period to those in
the prior periods that did not include FAS 123(R)
stock-based compensation expense.
Employer payroll taxes on employee non-qualified stock option
gains. This amount is dependent on eBay’s stock price
and the timing and size of exercise by employees of their stock
options, over which management has virtually no control, and as
such does not correlate to eBay’s operation of the business.
Amortization of acquired intangible assets. eBay incurs
amortization of acquired intangible assets in connection with
acquisitions and investments. eBay excludes these items because
they arise from eBay’s prior acquisitions and have no
direct correlation to the current operating results of
eBay’s business.
Gain on sale of equity investment. eBay does not actively
trade public equity securities nor does it rely on these
securities positions for funding of ongoing operations. eBay
excludes these gains because they are unrelated to eBay’s
ongoing business and operating results.
Income taxes associated with certain non-GAAP entries.
This amount is used to present each of the 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, eBay also
uses free cash flow. Free cash flow represents operating cash
flows less net purchases of property, buildings, and equipment.
eBay 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 eBay’s business, make
strategic acquisitions, strengthen the balance sheet and
repurchase stock. A limitation of free cash flow is that it does
not represent the total increase or decrease in the
company’s cash balance for the period.
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