eBay Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The fourth-quarter figures below are unaudited. Following the July 2015 PayPal spin-off and November 2015 Enterprise sale, both businesses are presented as discontinued operations; continuing results primarily reflect Marketplace, StubHub and Classifieds.
Business context and operating performance
eBay operates global commerce and ticketing marketplaces and online classifieds. At year-end, Marketplace and StubHub had more than 162 million active buyers and over 800 million listings. FY 2015 GMV was $81.7 billion, including $78.1 billion for Marketplace and $3.6 billion for StubHub.
| Metric | FY 2015 | FY 2014 | Change / context |
|---|---|---|---|
| Net revenue, continuing operations | $8.592 billion | $8.790 billion | Down 2%; up 5% FX-neutral |
| Gross profit / gross margin | $6.821 billion / 79.4% | $7.127 billion / 81.1% | Margin declined |
| Operating income / operating margin | $2.197 billion / 25.6% | $2.476 billion / 28.2% | Income down 11% |
| Continuing income (loss) | $1.947 billion | $(865) million | 2014 included a major tax charge |
| Net income, including discontinued operations | $1.725 billion | $46 million | Includes 2015 discontinued-operations loss |
| Diluted EPS, continuing operations | $1.60 | $(0.69) | Comparability affected by 2014 tax charge |
| Continuing operating cash flow | $2.877 billion | $3.228 billion | Down $351 million |
| Capital expenditures | $668 million | $622 million | Continuing investing activities |
| Cash and cash equivalents | $1.832 billion | $4.105 billion | Continuing operations at year-end |
| Long-term debt | $6.779 billion | $6.777 billion | No short-term debt at year-end 2015 |
Reported GMV declined 1% and transaction revenue declined 2%, primarily reflecting foreign-exchange headwinds. On an FX-neutral basis, GMV grew 5% and transaction revenue 4%. Marketplace take rate fell to 7.81% from 7.98%; StubHub take rate rose to 20.29% from 19.83%. International revenue was $4.968 billion, or about 58% of total revenue.
Q4 2015: Revenue was $2.322 billion, approximately flat versus $2.323 billion in Q4 2014. Continuing income was $523 million versus $729 million; net income, including discontinued operations, was $477 million versus $1.023 billion.
Liquidity, capital allocation and debt
Year-end working capital from continuing operations was $5.641 billion. Management reported $8.5 billion of cash, cash equivalents and short- and long-term non-equity investments, including approximately $7.0 billion held outside the U.S. The company stated that existing liquidity, operating cash generation, borrowing capacity and capital-market access should fund foreseeable needs. It had no commercial paper outstanding and no borrowings under its $2 billion revolving facility; $500 million of that facility was available for other permitted uses after reserving capacity against the commercial-paper program.
eBay repurchased approximately $2.1 billion of shares in 2015; about $1.8 billion remained authorized. It did not anticipate paying cash dividends in the foreseeable future. Credit ratings remained investment grade but were lowered following the PayPal distribution.
Material changes, outlook and notable items
- PayPal was distributed to shareholders on July 17, 2015; eBay contributed approximately $3.8 billion of cash to PayPal in connection with the separation.
- Enterprise was sold for $925 million, with the sale closing November 2, 2015. eBay recorded a $786 million goodwill impairment and a $35 million disposal loss; Enterprise’s FY 2015 discontinued-operations loss was $738 million after tax.
- FY 2014 continuing results included an approximately $3.0 billion tax provision on $9.0 billion of previously undistributed foreign earnings, contributing to the reported continuing loss and unusually high 134% effective tax rate. FY 2015 effective tax rate was 19%.
- General and administrative expense rose 26% to $1.122 billion, driven in part by restructuring, separation costs, craigslist litigation costs and lower post-separation synergies. Sales and marketing expense fell 7% and product development expense fell 6%.
- A workforce reduction was completed in the first half of 2015. Management expected annual savings above $150 million, primarily in sales and marketing and product development, but said reinvestment in those areas was expected to offset the savings.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected transaction seasonality to follow general consumer buying patterns and stated that repurchases could continue subject to market conditions.
Risks, contingencies and unusual matters
- Competition, lower Marketplace take rates, buyer and seller incentives, and the ability to maintain user engagement and service levels may pressure growth and margins.
- International operations and cross-border commerce expose eBay to foreign-exchange movements, regulatory and tax changes, and geopolitical and economic risks. The stronger U.S. dollar reduced reported 2015 revenue; management noted that post-separation fewer currency flows qualified for cash-flow hedge accounting.
- The filing highlights cybersecurity and system-availability risks. The 2014 breach involving usernames, encrypted passwords and other non-financial data continued to draw regulatory inquiries; the company had not been notified of an intended enforcement action as of the filing.
- Legal and regulatory matters include intellectual-property claims, competition and privacy issues, and ticket-resale regulation. StubHub’s antitrust case against Ticketmaster and the Golden State Warriors was dismissed in November 2015; StubHub was appealing. The craigslist litigation settled in June 2015. Recorded legal accruals were not material, but outcomes remain uncertain.
- The PayPal separation created potential indemnification and tax risks, including the possibility that the distribution could be treated as taxable if relevant representations or conditions are not satisfied.
- Approximately $6.0 billion of foreign earnings was designated indefinitely reinvested. The filing also reports $440 million of gross unrecognized tax benefits and ongoing tax examinations.
Important facts for investors to verify
- Assess continuing-business growth using both reported and FX-neutral results, particularly Marketplace GMV, take rate and incentive trends.
- Review the audited statements and discontinued-operations notes to separate eBay’s ongoing results from PayPal and Enterprise, and to understand the Enterprise impairment and sale proceeds.
- Check cash-flow conversion, the use of cash for share repurchases, debt maturities and the effect of the post-spin-off credit-rating reductions.
- Monitor whether planned workforce savings are offset by reinvestment, and whether higher cost of revenue and general and administrative expense persist.
- Track foreign-earnings repatriation and tax exposures, as well as developments in cybersecurity inquiries, litigation and regulatory matters.