eBay Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. eBay operates Marketplace and Classifieds. StubHub was sold on February 13, 2020; its results are presented as discontinued operations. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $2.865B | $2.423B | $5.239B | $4.836B |
| Gross profit | $2.267B | $1.870B | $4.115B | $3.744B |
| Operating income | $821M | $558M | $1.450B | $1.151B |
| Operating margin | 28.7% | 23.0% | 27.7% | 23.8% |
| Income from continuing operations | $740M | $400M | $1.225B | $916M |
| Diluted continuing-operations EPS | $1.04 | $0.46 | $1.67 | $1.03 |
| Net income, including discontinued operations | $746M | $402M | $4.158B | $920M |
| Continuing operating cash flow | $964M | $695M | $1.666B | $1.267B |
- Q2 revenue increased 18% year over year, or 21% on an FX-neutral basis. Marketplace GMV rose 26% reported and 29% FX-neutral; Marketplace take rate increased to 9.02% from 8.78%.
- Marketplace revenue growth reflected stronger traffic, buyer acquisition and conversion, as pandemic-related changes increased online shopping; promoted listings also supported take rate. Classifieds revenue declined 26%, primarily due to seller incentives and weaker advertising amid COVID-19 conditions.
- Gross margin was approximately 79.1% in Q2 versus 77.2% a year earlier, calculated from reported revenue and gross profit. Higher payment processing costs and transaction-loss provisions partly offset revenue growth. Q2 provision for transaction losses rose 48% to $93M.
- Q2 interest and other, net was income of $182M versus expense of $51M a year earlier. This included a $293M increase in the fair value of the Adyen warrant; warrant remeasurement is non-cash and contributed to reported earnings volatility.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $1.006B; short-term investments were $4.297B and long-term investments were $832M. Cash and non-equity investments totaled approximately $5.8B, including about $3.5B held in foreign operations.
- Total debt was $8.677B, including $516M short-term debt and $8.161B long-term debt. Debt increased from $7.760B at year-end 2019. eBay issued $1.75B of notes during the first half, repaid $500M of notes at maturity, and repurchased part of its 2021 notes. No commercial paper or revolving-credit borrowings were outstanding; the $2B credit facility was available, subject to its terms. The company reported compliance with debt covenants.
- First-half continuing investing cash flow was a use of $2.206B, including purchases of investments largely offset by maturities and sales. Continuing financing cash flow was a use of $3.370B, including $4.030B of share repurchases and $226M of dividends, partly offset by debt issuance.
- First-half total operating cash flow was $1.556B, including a $110M use from discontinued operations. Cash, cash equivalents and restricted cash ended at $1.025B.
- eBay repurchased approximately $4B of shares in the first half. The February accelerated repurchase settled in July at approximately 74M shares and an average price of $40.77. The board declared a $0.16-per-share dividend in July, payable September 18, 2020.
Material changes, outlook and risks
- Reported first-half net income of $4.158B included $2.933B of after-tax discontinued-operations income, principally StubHub’s $3.876B pretax sale gain, partly offset by about $893M of tax. It should not be treated as recurring operating earnings.
- On July 20, 2020, eBay agreed to transfer Classifieds to Adevinta for $2.5B cash, subject to adjustments, and 540M Adevinta shares. The stated approximate total value was $9.2B based on Adevinta’s July 17 share price. Closing was expected by Q1 2021, subject to regulatory, shareholder and other conditions; the share consideration’s value may fluctuate.
- Management said existing cash and investments, operating cash generation, available facilities and capital-market access were expected to fund operations, anticipated capital expenditures, debt repayment and repurchases for the foreseeable future. It cautioned that COVID-19 could affect results, liquidity and financing access. The filing provides no specific forward revenue or earnings guidance.
- COVID-19 increased Marketplace activity in the quarter but pressured Classifieds advertising and seller demand; management warned that evolving consumer behavior could make results more volatile. Other key risks include intense competition, foreign-exchange movements, payments and transaction-loss exposure, regulation and litigation, cybersecurity, and substantial debt.
- The company recorded a $40M downward adjustment to certain equity investments in the quarter. Legal and regulatory accruals were not material for the first half, but the filing notes that outcomes are uncertain and could be material if resolved adversely.
Important facts for investors to verify
- Separate continuing-operations performance from StubHub’s sale gain and other discontinued-operation amounts when assessing earnings and EPS.
- Track whether the unusually strong Marketplace GMV and take-rate growth persist as pandemic-related shopping patterns change, and whether Classifieds advertising recovers.
- Monitor the Adyen warrant’s valuation and its non-cash effect on interest and other income, along with transaction-loss provisions and receivable allowances.
- Verify completion terms and timing of the Classifieds transfer, including regulatory and shareholder approvals and the market value of Adevinta shares received.
- Assess debt maturities, interest-rate exposure, repurchases and dividends against cash generation and liquidity; the filing reports $8.677B of debt versus approximately $5.8B of cash and non-equity investments.