eBay Inc. — Q2 2014 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. eBay reports Marketplaces, Payments (including PayPal and Bill Me Later), and Enterprise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $4,366 | $3,877 | $8,628 | $7,625 |
| Gross profit | $2,974 | $2,666 | $5,885 | $5,262 |
| Operating income | $794 | $750 | $1,672 | $1,550 |
| Net income (loss) | $676 | $640 | $(1,650) | $1,317 |
| Diluted EPS | $0.53 | $0.49 | $(1.30) | $1.00 |
| Operating margin | 18% | 19% | Not stated | Not stated |
- Q2 revenue increased 13%; operating income rose 6%, while operating margin narrowed, primarily because Payments represented a larger share of revenue and carries lower margins than Marketplaces.
- Six-month revenue rose 13% and operating income rose 8%. The reported six-month net loss primarily reflects a roughly $3.0 billion deferred tax provision recorded after eBay changed its plans for certain foreign earnings; it does not indicate an operating loss.
- Q2 segment revenue: Marketplaces $2.174 billion, up 9%; Payments $1.946 billion, up 20%; Enterprise $267 million, up 3%. Segment operating income was $788 million, $478 million, and $3 million, respectively. Payments operating income increased from $374 million a year earlier; Marketplaces decreased from $794 million.
- Key Q2 operating measures: Marketplaces GMV grew 12% to $20.485 billion; Payments net TPV grew 29% to $55.046 billion, including Merchant Services TPV growth of 35%; Enterprise Gross Merchandise Sales rose 15% to $940 million.
- Gross margin was approximately 68.1% in Q2 versus 68.8% a year earlier, based on reported revenue and gross profit. Transaction and loan-loss provision increased 20% in Q2 to $232 million.
Cash flow, liquidity, and debt
- Operating cash flow was $2.668 billion for the first six months, versus $1.948 billion a year earlier. Investing activities used $1.129 billion and financing activities used $2.238 billion. Cash and cash equivalents declined $660 million to $3.834 billion.
- At June 30, cash and cash equivalents were $3.834 billion and short-term investments were $3.535 billion. Cash, short-term investments, and long-term non-equity investments totaled approximately $12.4 billion; about $9.8 billion of these assets were held outside the U.S.
- Total debt was $5.321 billion, including $1.2 billion of commercial paper and $4.118 billion of long-term debt. The commercial paper weighted-average rate was 0.115%, with a weighted-average remaining term of 47 days. No borrowings were outstanding under the $3 billion credit agreement; $1 billion of capacity was available for other permitted purposes after reserving $2 billion to backstop commercial paper. eBay reported compliance with debt covenants.
- Funds receivable and customer accounts of $10.037 billion were matched by funds payable and amounts due to customers of the same amount; these balances largely relate to payment operations and should not be treated as unrestricted corporate liquidity.
- eBay repurchased $3.468 billion of stock in the first half, using $3.5 billion of cash in financing activities. Approximately $2.2 billion remained authorized for repurchases at quarter-end.
- Management said existing cash and investments, expected operating cash flow, borrowing capacity, and access to capital markets should fund operations, planned capital expenditures, the Bill Me Later receivables portfolio, and repurchases for the foreseeable future.
Material changes, outlook, and risks
- Tax and foreign cash: The company accrued about $3.0 billion of deferred U.S. and foreign withholding taxes on $9.0 billion of previously undistributed foreign earnings after changing its capital-allocation strategy. It had not repatriated those earnings by June 30; repatriation was estimated to provide about $6.0 billion of U.S. cash net of tax. Approximately $5.0 billion of other prior-year foreign earnings remained indefinitely reinvested.
- Cyberattack: A Q2 attack compromised an eBay Marketplaces authentication database containing usernames, encrypted passwords, and other non-financial customer data. eBay required users to reset passwords. It reported no indication of increased fraudulent account activity and no evidence that PayPal data was compromised. It recorded about $46 million of related expenses and customer credits, including approximately $41 million in Marketplaces. Management said disruption adversely affected results but could not quantify lost revenue or forecast the future effect on customer behavior.
- Business drivers: Payments growth reflected higher payment volume, greater merchant and consumer use, and Braintree; lower take rates, particularly from larger merchants and unbranded products, partly offset transaction-revenue growth. Marketplaces was affected by the cyberattack, Google search algorithm changes, incentives, and StubHub pricing changes. Foreign exchange movements benefited Q2 revenue by $69 million, including a $23 million negative hedging impact in Payments.
- Spending: Management anticipated sales and marketing spending would continue to increase during 2014. Product development priorities included mobile, user experience, search, platform development, and omnichannel capabilities. The filing provides no formal revenue or EPS guidance.
- Credit exposure: Loans and interest receivable were $2.939 billion. The Bill Me Later consumer receivables pool had a $3.0 billion outstanding balance; eBay bears credit losses on receivables it owns, net of the bank’s participation. About 90% of the portfolio was current; weighted-average FICO score was 687. Unused Bill Me Later credit commitments were approximately $17.4 billion, not an expected immediate draw.
- Contingencies and regulatory exposure: The Paris brand-owner litigation was settled in July 2014, with an immaterial effect at June 30. A DOJ antitrust matter concerning employee recruiting was settled in May, subject to court approval. The CFPB had issued investigative demands concerning Bill Me Later; the inquiry could lead to enforcement, costs, or business-practice changes. Various privacy, intellectual-property, payment-services, tax, and other legal matters remain risks; the company said probable legal accruals were not material for the first half.
- Other commitments: In June 2014, eBay agreed, subject to conditions, to arrange purchase of a Synchrony consumer-loan portfolio, expected in October 2016, at a price based on book value with adjustments and exclusions. The filing states no material off-balance-sheet arrangements.
Important facts for investors to verify
- Review the tax footnote and cash-location disclosures to understand the $3.0 billion deferred tax charge, future repatriation taxes, and availability of overseas funds.
- Track Marketplaces traffic, GMV, seller activity, and customer trust following the cyberattack, including any subsequent costs, regulatory actions, or changes in user behavior.
- Monitor PayPal take rates, merchant-services growth, transaction losses, and competitive and regulatory developments.
- Assess Bill Me Later credit quality, funding needs, available credit commitments, and the planned Synchrony portfolio purchase.
- Reconcile repurchases and commercial-paper borrowing with cash balances, debt maturities, and management’s stated liquidity priorities.
- Check later filings for developments in the CFPB inquiry, tax audits, data-breach inquiries, and other litigation or regulatory matters; the filing does not quantify possible losses for all such matters.