eBay Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. eBay operates Marketplace, StubHub and Classifieds. In Q1, it reorganized reporting from one segment to three; prior-period segment data was recast.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $2.643 billion | $2.580 billion | +2% reported; +4% FX-neutral |
| Gross profit / margin | $2.042 billion / 77.3% | $2.021 billion / 78.3% | Margin down about 1 percentage point |
| Operating income / margin | $609 million / 23.0% | $579 million / 22.5% | Income +5% |
| Net income | $518 million | $407 million | +27% |
| Diluted EPS | $0.57 | $0.40 | +$0.17 |
| Operating cash flow | $550 million | $495 million | +$55 million |
Net income included a $3 million after-tax loss from discontinued operations. Interest and other, net was income of $64 million, versus expense of $32 million a year earlier; the 2019 result included a $113 million noncash gain from revaluing a service-provider warrant. The effective tax rate was 22.6%, compared with 25.6%.
Marketplace revenue rose 3% to $2.162 billion, while Marketplace GMV fell 4% reported (1% FX-neutral) to $21.571 billion; higher take rate helped lift transaction revenue 5%. StubHub revenue fell 1% to $230 million, with GMV down 3%. Classifieds revenue rose 4% reported and 12% FX-neutral to $256 million. Consolidated GMV declined 4% to $22.589 billion.
Cash, debt and capital allocation
Cash and cash equivalents were $1.695 billion at quarter-end. Management reported $7.3 billion of cash, cash equivalents and short- and long-term non-equity investments, including approximately $6.7 billion held in foreign operations. Total debt was $9.25 billion, including $1.55 billion current and $7.70 billion long-term. No commercial paper or credit-agreement borrowings were outstanding; $500 million of credit-agreement capacity was available for other purposes. eBay reported compliance with debt covenants.
Investing cash flow was positive $558 million, primarily reflecting investment maturities and sales exceeding purchases; capital expenditures were $182 million. Financing cash outflow was $1.605 billion, including $1.431 billion of share repurchases and $125 million of dividends. eBay repurchased approximately 41.8 million shares for about $1.5 billion and had $5.7 billion of authorization remaining. A $0.14-per-share dividend was declared for payment in June 2019.
Material changes, outlook and risks
- Cost of revenue increased 8% to $601 million, raising its share of revenue to 22.8% from 21.7%, as eBay invested in site operations and payment processing. Operating expenses declined 1% overall; G&A rose 15%, primarily reflecting $38 million in restructuring charges for a workforce reduction substantially completed in Q1.
- Foreign currency movements reduced revenue by $68 million year over year; reported revenue growth was 2% versus 4% FX-neutral. Management expected Marketplace transaction revenue and GMV growth to continue diverging during 2019.
- eBay announced an operating review and a strategic review of its asset portfolio, including StubHub and Classifieds. No transaction or completion timetable was assured. Management said available liquidity, operating cash generation and financing access were expected to fund operations, planned capital expenditures, debt repayment and repurchases for the foreseeable future; the filing provides no numerical earnings or revenue guidance.
- Motors.co.uk was acquired for $93 million in cash. The acquisition was not material to reported results. Adoption of lease accounting added $728 million of right-of-use assets and $744 million of lease liabilities at January 1, 2019, without a material income-statement or cash-flow impact.
- Key exposures include intense ecommerce competition, foreign-exchange and interest-rate movements, cybersecurity and service interruptions, privacy and other regulation, tax examinations, litigation and the risks of the strategic review. Legal accruals were not material, but management cautioned that proceedings are inherently uncertain. Tax authorities were examining tax years 2008–2016; eBay expected gross unrecognized tax benefits to decline by at least $191 million within 12 months.
Important facts for investors to verify
- Whether Marketplace GMV declines persist and whether higher take rates can sustain transaction-revenue growth.
- How much Q1 earnings growth depended on the noncash $113 million warrant revaluation gain, and how that warrant’s value may fluctuate.
- Any outcome or cost from the StubHub/Classifieds strategic review and operating review.
- The sustainability of repurchases and dividends relative to operating cash flow, investment holdings and $9.25 billion of debt.
- Developments in tax examinations, litigation and regulatory matters, and foreign-currency effects on reported results.