eBay Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. eBay operates Marketplaces, Payments (including PayPal and Bill Me Later), and Enterprise.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $3.892B | $3.404B | $11.517B | $10.079B |
| Operating income | $799M | $667M | $2.349B | $2.015B |
| Net income | $689M | $597M | $2.006B | $1.859B |
| Diluted EPS | $0.53 | $0.45 | $1.53 | $1.42 |
| Operating margin | 21% | 20% | Not stated | Not stated |
| Operating cash flow | $1.3B | $1.2B | $3.282B | $2.453B |
Q3 revenue grew 14%, operating income 20%, net income 15%, and diluted EPS 16% year over year. For the first nine months, revenue rose 14%, operating income 17%, and net income 8%. Cost of revenue grew 20% in both reported periods, faster than revenue; Q3 gross margin was approximately 68.5%, versus 70.0% a year earlier, calculated from reported figures.
- Segment trends, Q3: Marketplaces revenue was $2.027B (+12%) and operating income $789M; Payments revenue was $1.620B (+19%) and operating income $368M; Enterprise revenue was $238M (+5%) and operating income $12M. Corporate and other recorded a $370M operating loss.
- Operating indicators: GMV excluding vehicles grew 13% to $18.360B, while vehicle GMV fell 11%. Payments net TPV rose 25% to $43.837B, including merchant-services TPV growth of 30%. Enterprise Merchandise Sales rose 13% to $787M.
- Balance sheet at September 30: Cash and cash equivalents were $5.280B; short- and long-term investments totaled $9.129B. The company reported $13.0B of cash, cash equivalents, and short- and long-term non-equity investments. Total debt was $4.531B, including $408M short-term and $4.123B long-term. Current assets were $23.476B and current liabilities $12.028B. Funds receivable/customer accounts of $9.073B were matched by funds payable/customer liabilities of the same amount.
- Cash and capital allocation, nine months: Investing used $3.994B, including $5.726B of investment purchases and $969M of capital expenditures. Financing used $854M, including $1.088B in share repurchases. Cash declined $1.537B to $5.280B. The company repurchased about 20M shares at an average $54.95; $895M remained authorized.
Material changes and unusual items
- Payments growth was driven by TPV growth, but lower take rates—partly from a shift toward larger merchants and fewer currency-hedging gains—limited revenue growth. Payments cost of revenue rose to 41.0% of segment revenue from 40.2%.
- Marketplaces growth reflected increased GMV, while site infrastructure investment and customer support raised costs. Vehicle GMV declined. Enterprise costs increased faster than revenue, with cost of revenue at 73.5% of segment revenue versus 68.1%, reflecting lower take rates and investment in new Commerce Technologies.
- Q3 interest and other, net included an approximately $75M gain from repayment of the Kynetic note and sale of RueLaLa and ShopRunner investments. Nine-month results also included a $118M gain from the 2012 Rent.com divestiture, absent in 2013.
- The Q3 effective tax rate increased to 21.1% from 11.2%; the nine-month rate was 17.7% versus 15.8%. Management attributed the increases mainly to earnings mix and the Kynetic-related transaction.
- Provision for transaction and loan losses rose 25% in Q3 and 34% for the nine-month period, mainly due to transaction volume, Bill Me Later receivables, and higher transaction losses. The filing also reports a simplified buyer-claims process as contributing to more cases.
Outlook, risks, and contingencies
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management said existing liquidity, expected operating cash flow, available credit facilities, commercial paper capacity, and capital-market access should fund operations, capital expenditures, Bill Me Later receivables, and repurchases for the foreseeable future.
- eBay had agreed to acquire Braintree for approximately $800M, with closing expected late in Q4 2013, subject to conditions. The filing notes the usual integration and acquisition risks.
- Management highlighted competition and the need to adapt to mobile and multichannel commerce; execution risk in migrating Enterprise clients to its new platform; service reliability and security; foreign exchange exposure; and regulatory, licensing, and bank-partner dependencies in Payments. An August 2013 Consumer Financial Protection Bureau investigation demand sought information on Bill Me Later; eBay said it was cooperating.
- Bill Me Later exposes eBay to consumer-credit losses and funding needs. Its receivables portfolio was $2.6B gross, with a weighted-average FICO score of 685; about 89% was current. A pending lawsuit alleges Bill Me Later acted as the true lender. The filing also identifies a risk if issuer-bank lending is interrupted.
- Material legal matters include intellectual-property and counterfeit-goods disputes, including proceedings in France and the U.K.; data-breach litigation in Korea; and a U.S. Department of Justice antitrust case concerning alleged employee-recruiting agreements. Management states that probable legal accruals were not material for the nine months, but says potential non-monetary remedies cannot be estimated.
- Tax authorities were examining multiple years and jurisdictions; settlement discussions could materially change tax reserves within 12 months, though the full possible adjustment range was not estimable. Gross unrecognized tax benefits were $360M at quarter-end.
Important facts for investors to verify
- Whether TPV and GMV growth can continue without further deterioration in take rates, transaction losses, or segment costs.
- Progress, costs, and client retention in the Enterprise Commerce Technologies migration.
- Closing terms and integration impact of the proposed Braintree acquisition.
- Bill Me Later credit performance, funding requirements, issuer-bank continuity, and regulatory or legal outcomes.
- Cash availability and potential tax costs associated with $9.1B of cash and investments held outside the U.S.; also monitor the $400M senior notes due in October 2013 and subsequent repayment or refinancing.
- Developments in significant legal proceedings, tax audits, Payments regulation, and cybersecurity or service interruptions.