EBAY INC quarterly report, Q2 FY2016

Full document

eBay Inc. — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. eBay reported one operating and reportable segment, comprising Marketplace, StubHub and Classifieds. PayPal and Enterprise are presented as discontinued operations; PayPal separated in July 2015 and Enterprise was sold in November 2015, so prior-year comparisons are not fully like-for-like.

Key financial metrics

  • Q2 revenue: $2.230 billion, up 6% reported and 7% on an FX-neutral basis year over year. International revenue was $1.285 billion, about 58% of total.
  • Q2 operating results: Gross profit was $1.737 billion; operating income was $531 million, versus $428 million a year earlier. Operating margin rose to 24% from 20%. Gross margin was about 77.9%, down from 79.4%, as cost of revenue rose faster than revenue.
  • Q2 earnings: Continuing-operations income was $437 million, or $0.38 diluted EPS, versus $430 million, or $0.35, in Q2 2015. Net income was $435 million versus $83 million; the prior-year net result included a $347 million discontinued-operations loss, including a goodwill impairment related to Enterprise.
  • Revenue mix and activity: Marketplace revenue was $1.798 billion, essentially flat year over year; StubHub revenue was $225 million, up 40%; Classifieds marketing and other revenue was $207 million, up 15%. Total GMV rose 4% reported, or 6% FX-neutral. Marketplace take rate declined to 7.69% from 7.91%; StubHub take rate rose to 21.23% from 20.43%.
  • First-half results: Revenue was $4.367 billion, up 5% reported and 7% FX-neutral. Continuing-operations income was $919 million versus $879 million; diluted continuing-operations EPS was $0.79 versus $0.72.
  • Cash flow: First-half cash from continuing operations was $1.405 billion, up from $1.047 billion. Capital expenditures were $305 million. Continuing investing activities used $1.973 billion, while continuing financing activities provided $685 million, including $2.216 billion of net debt proceeds and $1.501 billion of repurchases.
  • Liquidity and debt: Cash and cash equivalents were $2.001 billion; short- and long-term investments totaled $9.626 billion. Long-term debt was $9.054 billion, up from $6.749 billion at year-end 2015, primarily following the issuance of $2.25 billion of notes. No commercial paper or credit-agreement borrowings were outstanding; $500 million of credit-agreement capacity was available for other purposes. The company reported compliance with debt covenants.

Material changes and management commentary

  • Marketplace GMV grew, but transaction revenue lagged volume as take rate fell, which management attributed to seller mix and higher buyer and seller incentives. FX-neutral Marketplace transaction revenue grew 2% in Q2 while GMV grew 5%.
  • StubHub was a major growth contributor: Q2 GMV rose 35% and transaction revenue rose 40%, driven by Sports, Concerts and Theater and a higher take rate.
  • Marketing services and other revenue increased 14% in Q2, including growth in Marketplace referral and advertising fees and Classifieds revenue in developed markets.
  • Q2 general and administrative expense fell $135 million year over year, partly because PayPal separation and craigslist litigation costs recorded in Q2 2015 did not recur. Product development expense increased $63 million, reflecting platform investment and higher employee-related costs.
  • Interest and other, net shifted to an $8 million expense from $124 million of income in Q2 2015, mainly because prior-year investment-sale gains did not recur; new debt also increased interest expense.
  • Management said existing cash, investments, operating cash generation, borrowing capacity and capital-markets access should fund operations, expected capital expenditures and repurchases for the foreseeable future. No specific earnings or revenue guidance is provided in the filing.
  • The company expected announced acquisitions to close in Q3 2016 for approximately $250 million. In July 2016, the board authorized an additional $2.5 billion repurchase program; $336 million remained under the prior program at quarter-end.

Risks, contingencies and unusual items

  • Foreign exchange remains a key exposure given the international revenue base. Management noted that fewer currency flows qualified for cash-flow hedge accounting after the PayPal separation, potentially increasing income-statement volatility. A hypothetical 20% adverse currency move was estimated to reduce pretax income by about $27 million after hedges.
  • Approximately $7.3 billion of cash and investments was held by non-U.S. subsidiaries. About $4.8 billion was available for U.S. use subject to additional taxes if repatriated; other foreign funds were designated indefinitely reinvested.
  • Legal and regulatory matters include potential actions related to the 2014 data breach, intellectual-property and other disputes, and possible disagreements or indemnity claims with PayPal. Management said probable legal accruals were not material and that certain potential losses, particularly non-monetary remedies, could not be estimated.
  • Tax authorities were examining tax years 2003–2014; the company said unrecognized tax benefits could change significantly within 12 months but it could not estimate the full range. It had not recognized a benefit or expense related to the Altera stock-compensation tax case pending appeal.
  • Other disclosed risks include intense ecommerce competition, economic and international-market uncertainty (including uncertainty following the UK vote to leave the EU), cyberattacks and system interruptions, regulation, fraud, and the company’s substantial debt. The filing reported no material off-balance-sheet arrangements.

Important facts for investors to verify

  • Whether Marketplace volume growth can translate into improved transaction revenue and take rate, given incentives and seller-mix pressure.
  • Whether StubHub’s strong growth and higher take rate persist, and how much growth reflects event and seller mix.
  • How the higher debt balance, interest costs, repurchases and announced acquisitions affect liquidity and capital allocation.
  • The accessibility and potential tax cost of foreign-held funds, and the effect of currency movements on reported results.
  • Developments in tax examinations, data-breach-related matters, intellectual-property disputes and PayPal separation obligations.