eBay Inc. 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2018. eBay operates Marketplace, StubHub and Classifieds platforms and reports one operating segment. Prior-year comparisons reflect the company’s retrospective adoption of the new revenue-recognition standard.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $2.640 billion | $2.419 billion | $5.220 billion | $4.722 billion |
| Operating income | $406 million | $480 million | $985 million | $1.027 billion |
| Net income | $642 million | $29 million | $1.049 billion | $1.064 billion |
| Diluted EPS | $0.64 | $0.03 | $1.03 | $0.97 |
| Cash from operating activities | $372 million | $699 million | $867 million | $1.281 billion |
- Q2 revenue increased 9% reported and 6% FX-neutral; first-half revenue rose 11% reported and 7% FX-neutral. Q2 gross margin was approximately 77.4%; operating margin was 15.4%, down from 19.8% a year earlier.
- Q2 total GMV increased 10% reported and 7% FX-neutral to $23.629 billion. Marketplace GMV grew 11% reported (7% FX-neutral); StubHub GMV rose 5%. Total transaction take rate declined to 8.79% from 8.92%.
- At June 30, cash and cash equivalents were $1.619 billion; short- and long-term investments were $2.388 billion and $5.418 billion. Total debt was $9.204 billion, compared with $10.015 billion at year-end 2017. Current assets were $6.184 billion and current liabilities $2.608 billion.
- First-half investing cash flow was positive $1.547 billion, largely reflecting net investment maturities and sales; financing cash outflow was $2.867 billion. eBay repurchased $2.0 billion of shares and repaid $750 million of notes during the half.
Changes, unusual items and management commentary
- Reported revenue growth benefited from currency movements; international revenue was $1.585 billion in Q2, up 12%. Classifieds marketing and other revenue rose 18%, led primarily by Germany.
- Operating income declined despite revenue growth as operating expenses increased 19% in Q2. General and administrative expense included $84 million of workforce-restructuring charges; the workforce reduction was substantially completed in Q2.
- Net income comparisons are heavily affected by unusual items. Q2 2018 interest and other income included a $266 million gain on relinquishing eBay’s Giosis equity-method investment and a $106 million gain from revaluing a service-provider warrant. Q2 2017 income tax expense included a noncash $311 million charge related to foreign-currency remeasurement of deferred tax assets.
- In May, eBay acquired Giosis’s Japan business, including Qoo10.jp, for $306 million cash plus relinquishment of its existing Giosis investment. eBay also announced its intention to sell its Flipkart ownership interest, expected to close in the second half of 2018 subject to regulatory approval.
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management said existing cash, investments, operating cash generation, borrowing capacity and capital-market access should fund operations, capital expenditures, debt repayment and buybacks for the foreseeable future; it expected to continue opportunistic and programmatic repurchases subject to market conditions.
Risks, contingencies and outlook
- Management had not completed its analysis of the provisional $3.1 billion U.S. tax-reform charge recorded in Q4 2017 and expected to complete it by Q4 2018; adjustments could materially affect income tax expense. Tax audits and unrecognized tax benefits also remain uncertain.
- Legal and regulatory proceedings are ongoing. Accrued losses were not material for the first half, but management cautioned that outcomes are unpredictable and certain non-monetary remedies cannot be estimated.
- Key disclosed risks include intense ecommerce competition, foreign-currency exposure, privacy and cybersecurity obligations, regulation of online marketplaces and StubHub, potential sales-tax collection requirements following the Wayfair decision, and servicing substantial debt. A 20% adverse currency move was estimated to affect pretax income by approximately $52 million after hedges.
- eBay reported compliance with debt covenants, no commercial-paper borrowings and $500 million available under its $2 billion credit agreement for other permitted purposes. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of reported revenue and GMV growth is sustainable on an FX-neutral basis, and whether the lower Marketplace take rate persists.
- The recurring earnings and tax profile apart from the Giosis and warrant gains, restructuring charges, and prior-year tax comparability effects.
- Cash-flow conversion, working-capital movements, and the company’s use of liquidity for buybacks versus investment and debt obligations.
- Completion and proceeds of the planned Flipkart sale, and integration and performance of the acquired Giosis Japan business.
- Final tax-reform calculations, evolving tax-collection obligations, and material developments in litigation or regulatory proceedings.