eBay Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. eBay reported Marketplace, StubHub and Classifieds as one operating segment. PayPal and Enterprise are presented as discontinued operations following their separation and sale, respectively.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Net revenues | $2.217 billion | $2.099 billion | +6% reported; +8% FX-neutral |
| Gross profit | $1.719 billion | $1.666 billion | +3% |
| Income from operations | $542 million | $578 million | -6% |
| Operating margin | 24% | 28% | Down 4 percentage points |
| Income from continuing operations | $418 million | $545 million | -23% |
| Diluted EPS from continuing operations | $0.36 | $0.45 | Down $0.09 |
| Cash from continuing operating activities | $802 million | $704 million | +14% |
For the nine months, revenue was $6.584 billion, up 5% reported (7% FX-neutral); operating income was $1.687 billion, up 10%; continuing-operations income was $1.337 billion, down 6%; and diluted continuing-operations EPS was $1.16, unchanged. Continuing operating cash flow was $2.207 billion versus $1.751 billion.
Q3 cost of revenue rose 15% to $498 million and increased to 22.5% of revenue from 20.6%, reflecting customer support, logistics and fulfillment, payment processing, and investment in site operations and data centers. Gross margin was approximately 77.5%, versus 79.4%. Product development expense rose 20% to $288 million, primarily on higher employee costs and platform investment. Lower interest and other income—negative $9 million versus positive $87 million—was a significant factor in the decline in pretax and continuing income; prior-year results included investment-sale gains.
Revenue and operating trends
- Q3 total GMV increased 3% reported and 5% FX-neutral to $20.115 billion. Marketplace GMV rose 2% reported (4% FX-neutral); StubHub GMV rose 23%.
- Net transaction revenue increased 5% to $1.745 billion. StubHub transaction revenue rose 31% to $261 million, supported by higher GMV and take rate; Marketplace transaction revenue rose 2% to $1.484 billion.
- Marketing services and other revenue increased 7% to $472 million. Classifieds revenue grew 11% to $197 million, with growth in developed markets including Germany, Canada and Australia.
- International revenue was $1.243 billion, or approximately 56% of Q3 revenue. Currency movements reduced reported Q3 revenue by $54 million versus the prior-year exchange rates.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $1.753 billion; short- and long-term investments were $10.213 billion. Total debt was $9.031 billion, including $1.449 billion classified as short-term. The company issued $2.25 billion of senior notes in Q1 2016.
- Cash and investments totaled approximately $10.4 billion, but approximately $7.6 billion was held by foreign subsidiaries. The filing says approximately $4.9 billion of foreign-held funds could be used in the U.S. without additional U.S. income taxes beyond amounts accrued; repatriating other indefinitely reinvested funds could trigger taxes.
- Nine-month continuing investing cash flow was negative $2.568 billion, including $7.782 billion of investment purchases, $490 million of capital expenditures and $201 million of acquisition spending, partly offset by investment maturities and sales.
- Continuing financing cash flow was positive $182 million: $2.216 billion of debt proceeds was largely offset by $2.002 billion of share repurchases. The board authorized a further $2.5 billion repurchase program in July; $2.336 billion remained available at quarter-end. Management expected opportunistic repurchases, subject to market conditions.
- No commercial paper or credit-agreement borrowings were outstanding. Of the $2 billion credit facility, $500 million was available for other permitted purposes after reserving capacity to support the commercial paper program. eBay reported compliance with debt covenants and investment-grade ratings with stable outlooks.
Outlook, commentary and risks
- The filing provides no quantified forward guidance. Management said it expects platform transaction activity to follow general consumer buying patterns and expects those trends to continue. It stated that existing cash and investments, operating cash flow, available borrowing capacity and capital-market access should fund operations, anticipated capital expenditures and repurchases for the foreseeable future.
- Subsequent to quarter-end, eBay sold most of its MercadoLibre investment for $1.2 billion. At quarter-end, marketable equity instruments, primarily MercadoLibre, had a fair value of $1.5 billion.
- Key disclosed risks include intense ecommerce competition; foreign-currency and international-market exposure, including uncertainty following the U.K. vote to leave the EU; cybersecurity, privacy and service-availability risks; regulation and litigation; fraud and transaction losses; and ticket resale regulation and competition. The 2014 data breach remained subject to regulatory information requests; eBay said it had not been notified of an intended enforcement action.
- Tax authorities were examining eBay for tax years 2003–2014. The company said the amount and timing of possible changes to unrecognized tax benefits could not be estimated. It had not recorded a benefit or expense regarding the appeal of the Altera stock-compensation tax case, pending further developments.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. Legal accruals were not material, but the company cautioned that proceedings are inherently uncertain and adverse outcomes could be material.
Most important facts for investors to verify
- Whether Marketplace growth, take rates and margins improve, given Q3 revenue growth alongside lower operating margin and higher cost of revenue.
- How sustainable StubHub and Classifieds growth is, and whether StubHub’s higher take rate reflects durable mix or temporary factors.
- The effect of foreign exchange, international operations and any U.S. tax cost if foreign funds are repatriated.
- Debt service and refinancing needs, future repurchases, and how the $1.2 billion MercadoLibre sale proceeds are used.
- Developments in tax audits, privacy and data-security investigations, intellectual-property claims, and other litigation or regulatory matters.