eBay Inc. — Q3 2010 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and nine months ended September 30, 2010. eBay operates Marketplaces and Payments (PayPal and Bill Me Later). Skype was sold in November 2009; its results are included in the 2009 comparison through the sale date, but not in 2010.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are year over year.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net revenue | $2,249.5 | $2,237.9 | $6,660.9 | $6,356.4 |
| Gross profit | $1,609.2 | $1,593.9 | $4,798.7 | $4,547.4 |
| Operating income | $490.2 | $442.9 | $1,463.4 | $1,277.4 |
| Net income | $431.9 | $349.7 | $1,241.8 | $1,034.2 |
| Diluted EPS | $0.33 | $0.27 | $0.94 | $0.80 |
| Operating cash flow | Quarterly: approximately $747.1 | Management said approximately consistent | $1,891.8 | $2,137.5 |
- Q3 reported revenue rose about 1%; excluding Skype revenue in the prior-year quarter, management said revenue growth was 10%. Payments revenue increased 22%, while Marketplaces revenue increased 3%.
- Q3 gross margin was approximately 71.5% versus 71.2%; operating margin was approximately 21.8% versus 19.8%; net margin was approximately 19.2% versus 15.6%.
- For the first nine months, revenue increased 5%, operating income 15%, and net income 20%. Diluted EPS was $0.94 versus $0.80.
- Q3 operating results benefited from lower acquired-intangible amortization and productivity gains, partly offset by foreign exchange and faster growth in lower-margin Payments. Payments segment margin improved 4.5 percentage points; Marketplaces segment margin declined 2.3 points.
- Q3 GMV excluding vehicles grew 3% to $12.6 billion; total GMV grew 1% to $14.7 billion. Payments net TPV increased 26% to $22.4 billion. Merchant Services TPV grew 40%.
Cash, liquidity and capital
- Cash and cash equivalents were $4.18 billion at September 30, 2010, versus $4.00 billion at year-end 2009. Management reported $6.1 billion in cash, cash equivalents and non-equity investments, up from $5.2 billion.
- Nine-month operating cash flow was $1.89 billion. Capital expenditures, net, were $526.4 million, implying free cash flow of approximately $1.37 billion under the company’s definition, versus approximately $1.74 billion in 2009.
- Nine-month investing cash outflow was $1.39 billion, principally reflecting $2.02 billion of investment purchases and $526.4 million of capital expenditures, partly offset by investment maturities and sales and Skype note repayment. Financing cash outflow was $259.1 million, including $297.7 million of repurchases.
- No amounts were outstanding under the $1.8 billion revolving credit facility, and eBay reported compliance with its covenants. The board authorized issuance of up to $1.5 billion of term debt under its shelf registration; this was authorization, not a reported issuance.
- Approximately $5.2 billion of cash and cash equivalents was held outside the U.S.; repatriation could result in additional U.S. taxes in certain circumstances. A European cash-pooling arrangement included $3.4 billion in withdrawals offset by $3.5 billion in deposits.
- In September, the board authorized an additional $2.0 billion share repurchase program. At quarter-end, approximately $2.36 billion remained authorized across repurchase programs.
Outlook, commentary and notable items
- Management expected Q4 growth to be led by Payments, supported by net TPV growth; it expected Marketplaces growth to be led by Europe, with stable U.S. results. A stronger U.S. dollar was expected to weigh on Q4 revenue and diluted EPS growth. No numerical forecast was provided in the filing text.
- Management cited operational efficiencies and resource reallocation toward customer-focused initiatives as ongoing priorities.
- Foreign exchange movements reduced Q3 revenue by approximately $42.9 million year over year, net of the positive impact of hedging. Nine-month currency movements had a positive revenue impact of approximately $37.6 million.
- Skype repaid its $125 million subordinated note and $50 million of senior debt securities in March 2010. eBay recorded a gain of approximately $22.8 million, with a $13.7 million impact on net income, and reinvested approximately $91.4 million in new Skype senior debt securities.
- The Q3 effective tax rate was 16%, compared with 20% a year earlier; the nine-month rate was 18% versus 20%. Unrecognized tax benefits totaled $904.3 million at quarter-end, with tax examinations ongoing.
- The 2009 customer-service consolidation affected approximately 1,000 employees, had incurred $47.4 million of charges through September 30, and was expected to conclude by year-end 2010.
Risks and contingencies
- Material exposures include competition and slower growth in established Marketplaces, foreign-currency movements, fraud and transaction losses, customer-protection costs, cybersecurity and service outages, and dependence on third-party payment processors and lenders.
- Bill Me Later transitioned to WebBank as its credit-product issuer effective September 1, 2010. eBay purchased receivables generated by the bank; credit performance, funding, and regulatory or legal changes could affect the business. The filing reports a nine-month 2010 net charge-off rate of 8.40%, compared with 10.66% for full-year 2009.
- Legal matters include brand-owner disputes and injunctions in France, with the Paris Court of Appeal reducing a damages award to EUR 5.7 million in September 2010; related compliance proceedings and other intellectual-property cases remain. Other contingencies include PayPal account-restriction class actions, tax examinations, and the Korean subsidiary data-breach litigation.
- Management stated it believed existing cash, operating cash generation, credit availability, and potential financing were sufficient for foreseeable needs. Actual results remain subject to the risks and uncertainties described in the filing.
Important facts for investors to verify
- Assess the sustainability of PayPal’s TPV and Merchant Services growth, including the effect of lower take rates and rising transaction costs.
- Track Marketplaces GMV and segment margins, especially the contrast between growth excluding vehicles and declining vehicle GMV.
- Reconcile operating cash-flow and free-cash-flow declines with working-capital movements and the $207.4 million tax payment related to a 2009 legal-entity restructuring.
- Evaluate cash accessibility and possible tax costs on foreign-held funds, and distinguish authorized debt and repurchases from amounts actually issued or spent.
- Monitor tax reserves, legal outcomes and possible operating changes from the French injunctions and PayPal-related proceedings.
- Allow for the Skype sale and related gains when comparing reported periods; 2009 results include Skype operations that are absent from 2010.