eBay Inc. — Q2 2019 Form 10-Q
Business context and period. The quarter and six months ended June 30, 2019. eBay operates Marketplace, StubHub and Classifieds; in Q1 2019 it changed from one reportable segment to three, with prior-period segment data recast. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $2,687 | $2,640 | $5,330 | $5,220 |
| Operating income | $561 | $406 | $1,170 | $985 |
| Operating margin | 20.9% | 15.4% | 21.9% | 18.9% |
| Net income | $402 | $642 | $920 | $1,049 |
| Diluted EPS | $0.46 | $0.64 | $1.04 | $1.03 |
| Operating cash flow | $744 | $372 | $1,294 | $867 |
- Q2 revenue rose 2% year over year, or 4% on an FX-neutral basis; six-month revenue rose 2%, or 4% FX-neutral. Gross profit was $2,057 in Q2 and $4,099 for the six months. Cost of revenue grew faster than revenue: 6% in Q2 and 7% year to date.
- Q2 segment revenue and operating income: Marketplace $2,157 and $691; StubHub $264 and $11; Classifieds $271 and $102. Corporate and other costs were $243.
- Total Q2 GMV declined 4% to $22,601; Marketplace GMV fell 5% to $21,484 while Marketplace take rate increased to 8.78% from 8.14%. StubHub GMV grew 5% to $1,117, while its take rate fell to 21.73% from 22.68%.
- At June 30, cash and cash equivalents were $1,508; short- and long-term investments were $2,969 and $1,936. Total cash and non-equity investments were approximately $6.3 billion, including approximately $5.8 billion held in foreign operations.
- Total debt was $9,306, including $2,063 short-term debt; stockholders’ equity was $4,106. No commercial paper or credit-agreement borrowings were outstanding. Of the $2 billion credit facility, $500 million was available for other purposes after reserving capacity for the commercial-paper program. eBay reported compliance with debt covenants.
- Six-month financing cash outflow was $3,258, principally $2,949 of share repurchases and $245 of dividends. Cash, cash equivalents and restricted cash ended the period at $1,521.
Material changes and unusual items
- Operating income improved substantially, driven mainly by lower corporate and other costs and Marketplace expenses; 2018 included higher restructuring and employee-related costs. Q2 general and administrative expense fell 26% year over year.
- Net income fell despite higher operating income. Q2 interest and other, net was an expense of $51 versus income of $301 in Q2 2018; the prior-year period included a $266 gain on relinquishment of the Giosis equity investment and a $106 warrant fair-value gain. Q2 2019 included an $8 warrant fair-value loss.
- Foreign exchange reduced Q2 reported revenue by $86 versus a favorable $70 impact in Q2 2018. Marketplace transaction-revenue growth reflected higher take rate and promoted-listing fees despite declining GMV; management expected that revenue/GMV divergence to continue through 2019.
- eBay adopted lease accounting in Q1 2019, recognizing $728 of right-of-use assets and $744 of lease liabilities at adoption; the filing says adoption had no material effect on income or cash flows. June 30 operating lease liabilities were $689 in total, including current amounts.
- In February 2019, eBay recorded $41 of restructuring charges, primarily severance; the reduction was substantially completed in Q1. The company acquired Motors.co.uk for $93 in cash during February.
Outlook, management commentary and risks
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management said existing cash and investments, operating cash generation, borrowing capacity and capital-market access should fund operations, anticipated capital expenditures, debt repayment and repurchases for the foreseeable future.
- eBay began an operating review and a strategic review of its portfolio, including StubHub and Classifieds. No outcome or timetable was assured; management cited potential employee-retention, management-distraction, litigation and business-disruption risks.
- The board authorized an additional $4 billion repurchase program in January 2019. Approximately $3.0 billion was repurchased in the first half, with $4.2 billion remaining authorized at June 30. The board declared a $0.14-per-share dividend payable in September 2019; future dividends and repurchases remain discretionary.
- Key disclosed risks include intense ecommerce competition; international and cross-border exposure, including currency movements and Brexit uncertainty; privacy, cybersecurity and service interruptions; regulatory and tax changes; litigation and intellectual-property claims; fraud and transaction losses; and substantial debt. A hypothetical 100-basis-point rise in interest rates would have reduced investment fair value by $23 at June 30. A 20% adverse FX move was estimated to affect pretax income by approximately $29 after hedges.
- Tax authorities were examining years 2008–2017; eBay expected gross unrecognized tax benefits to decline by at least $191 within 12 months but could not estimate the full range of possible audit adjustments. Legal accruals were not material for the first half, though the company cautioned outcomes are uncertain and certain non-monetary remedies could not be estimated.
Important facts for investors to verify
- Whether Marketplace GMV weakness persists and whether higher take rates and promoted listings can sustain transaction-revenue growth.
- Drivers and durability of operating-margin improvement, including the effects of lower costs, restructuring and investment in site operations, payment processing and inventory.
- How the StubHub and Classifieds strategic review develops, including any sale, spin-off or other transaction and associated costs or disruption.
- Near-term debt maturities, refinancing plans and the balance between repurchases, dividends, investment and liquidity; also consider that most reported cash and investments were held abroad.
- Developments in tax examinations, litigation and regulatory matters, and the impact of foreign exchange, interest-rate and cybersecurity risks.