eBay Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017. eBay operates Marketplace, StubHub and Classifieds platforms and reports one segment.
Financial results and operating metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenue | $2.580 billion | $2.303 billion | +12% reported; +7% FX-neutral |
| Gross profit / gross margin | $2.021 billion / 78.3% | $1.789 billion / 77.7% | Margin +0.6 percentage points |
| Operating income / margin | $579 million / 22.5% | $547 million / 23.7% | Margin -1.2 points |
| Income before taxes | $547 million | $558 million | -2% |
| Income tax provision (benefit) | $140 million expense | $477 million benefit | Significant unfavorable comparison |
| Net income | $407 million | $1.035 billion | -61% |
| Diluted EPS | $0.40 | $0.94 | -57% |
| Operating cash flow | $495 million | $582 million | -15% |
| GMV | $23.591 billion | $20.897 billion | +13% reported; +7% FX-neutral |
Marketplace transaction revenue rose 11% to $1.792 billion (7% FX-neutral); StubHub rose 12% to $231 million (11% FX-neutral). Classifieds, within marketing services and other revenue, increased 24% to $246 million (10% FX-neutral). Total transaction take rate declined to 8.57% from 8.68%; management attributed the Marketplace decline primarily to category mix and hedging activity, and StubHub’s decline to event mix.
Sales and marketing expense increased 17% to $756 million, product development increased 20% to $334 million, and general and administrative expense increased 9% to $270 million. Provision for transaction losses rose 18% to $72 million, primarily on higher customer-protection costs. Cost of revenue increased 9% to $559 million, but declined to 21.7% of revenue from 22.3%.
Balance sheet, liquidity and capital allocation
- At March 31, 2018, cash and cash equivalents were $2.527 billion; short- and long-term investments were $2.279 billion and $5.919 billion. Cash and non-equity investments totaled approximately $9.8 billion, versus $11.3 billion at year-end 2017; about $8.4 billion was held in foreign operations.
- Total debt was $9.228 billion, down from $10.015 billion at December 31, 2017, principally after repaying $750 million of notes that matured. The company had no commercial paper or credit-facility borrowings; $500 million of credit-agreement capacity was available for other permitted purposes. It reported compliance with debt covenants.
- Operating cash flow was $495 million. Investing activities provided $1.698 billion, mainly reflecting investment maturities and sales exceeding purchases; financing activities used $1.825 billion, including $1.009 billion of share repurchases and the $750 million debt repayment.
- The board authorized an additional $6.0 billion repurchase program in January. Approximately $6.6 billion remained authorized at quarter-end. Stockholders’ equity was $7.596 billion, down from $8.049 billion at year-end.
Material comparisons and unusual items
- Reported revenue benefited from foreign exchange: revenue increased 12% as reported but 7% FX-neutral. Management said the weaker U.S. dollar versus major currencies contributed to the reported increase.
- Net income comparisons were heavily affected by taxes. Q1 2017 included recognition of approximately $695 million in deferred tax assets following legal-structure realignment, contributing to a $477 million tax benefit and $1.035 billion net income. Q1 2018 had a 25.6% effective tax rate and $140 million tax expense.
- eBay adopted the new revenue standard retrospectively from January 1, 2018. Q1 2017 revenue was recast from $2.217 billion to $2.303 billion, with $86 million of certain coupons and rewards moved from a reduction of revenue to sales and marketing expense; net income and EPS were unchanged. The filing says the overall adoption impact on Q1 2017 transaction revenue was immaterial.
- Interest and other, net changed to a $32 million expense from $11 million of income, reflecting lower foreign-exchange gains, higher interest expense and a prior-year investment-sale gain.
- In Q4 2017, eBay recorded a provisional $3.1 billion tax charge related to U.S. tax reform. Its analysis was incomplete at March 31, 2018; adjustments could materially affect tax expense, with completion expected by Q4 2018.
Outlook, commentary and risks
The filing provides no specific quarterly or annual revenue, earnings or margin guidance. Management said existing cash, investments, expected operating cash generation, borrowing facilities and capital-market access should be sufficient for foreseeable operating needs, capital expenditures, debt repayment and repurchases. eBay expected to continue opportunistic and programmatic buybacks, subject to market conditions and other uncertainties.
eBay announced an agreement to acquire Giosis’ Japan business, including the Qoo10.jp platform, while relinquishing its investment in Giosis’ non-Japanese businesses. Closing was expected in Q2 2018, subject to customary conditions.
Key disclosed risks include intense ecommerce competition; dependence on international activity and foreign exchange rates; regulation, privacy and data-security requirements (including GDPR becoming effective in May 2018); litigation and intellectual-property claims; fraud and transaction losses; tax audits and uncertainty around tax reform; and substantial indebtedness. Management noted that currency hedges reduce but do not eliminate exposure. A hypothetical 20% adverse currency move was estimated to reduce pretax income by approximately $29 million after the effect of existing forwards.
Legal accruals were not material for the quarter, and eBay said it could not estimate potential losses from certain non-monetary remedies. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether underlying growth sustains the 7% FX-neutral revenue and GMV increases, particularly as reported growth benefited from currency movements.
- Whether the lower Marketplace and StubHub take rates stabilize, and how category and event mix affect monetization.
- How operating expenses, transaction-loss provisions and operating margin trend against revenue growth.
- How much of the sharp year-over-year net-income decline reflects the prior-year tax benefit, and whether the provisional $3.1 billion tax-reform charge or ongoing audits lead to further adjustments.
- Cash generation and investment balances after repurchases, debt service and the planned Japan acquisition; also confirm the expected transaction closing and terms.
- Debt servicing capacity, foreign-cash repatriation taxes, and developments in legal, regulatory, cybersecurity and competition matters.