eBay Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. eBay operates Marketplaces, Payments (including PayPal and Bill Me Later) and Enterprise. Unless otherwise stated, financial figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $3.877B | $3.398B | $7.625B | $6.675B |
| Gross profit | $2.666B | $2.411B | $5.262B | $4.705B |
| Operating income | $750M | $695M | $1.550B | $1.348B |
| Net income | $640M | $692M | $1.317B | $1.262B |
| Diluted EPS | $0.49 | $0.53 | $1.00 | $0.96 |
| Operating margin | 19% (approximately) | 20% (approximately) | 20.3% | 20.2% |
- Q2 revenue rose 14%; gross profit rose 11% and operating income rose 8%, while net income fell 8% and diluted EPS declined $0.04.
- Q2 revenue growth was led by Payments (+20%) and Marketplaces (+10%); Enterprise revenue increased 11%. Payments net TPV grew 24%, Marketplaces GMV excluding vehicles grew 13%, and Enterprise merchandise sales grew 21%.
- For the first six months, operating cash flow was $1.948B, versus $1.299B a year earlier. Investing used $1.090B and financing used $763M; cash increased $38M to $6.855B.
- At June 30, cash and cash equivalents were $6.855B; short-term debt was $410M and long-term debt was $4.123B, or $4.533B total. The company reported $11.7B of cash, cash equivalents and non-equity investments; approximately $8.9B of these assets were held outside the U.S. Current assets were $23.446B and current liabilities $11.670B. Customer funds receivable and payable were each $9.012B and should be distinguished from freely available liquidity.
- Capital spending on property and equipment was $652M in the first half. Share repurchases were $942M; approximately $1.0B remained under the authorized program at quarter-end.
Changes and notable items
- Q2 operating margin narrowed year over year, which management attributed mainly to faster growth in lower-margin Payments and a prior-year gain related to resolution of an indirect tax dispute. Payments margin also faced pressure from a lower take rate and investment in consumer awareness and products.
- Q2 net income and EPS were affected by the absence of the $118M Rent.com divestiture gain recorded in Q2 2012 and higher interest expense following the 2012 senior-note issuance. Lower tax expense partly offset these effects; Q2 effective tax rate was 15.3%, versus 18.7%.
- Transaction and loan loss provision increased 47% in Q2 to $193M, reflecting higher transaction volume, Bill Me Later portfolio growth, higher loss rates and more eBay Buyer Protection claims after a simplified filing process.
- Bill Me Later loans and interest receivable totaled $2.273B. Approximately 89% of the portfolio was current; its weighted-average borrower FICO score was 687. Management reported a 5.46% net charge-off rate for the first half, versus 4.81% for full-year 2012.
- The 2012 restructuring plan was substantially complete; the company reported $4M of remaining associated liability at June 30.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management said existing liquidity, operating cash generation, available borrowing capacity and capital-market access should be sufficient for operations, anticipated capital expenditures, Bill Me Later receivables and repurchases for the foreseeable future.
- There were no commercial-paper borrowings and no borrowings or letters of credit under the $3B revolving credit agreement. $1B of capacity was available for other permitted purposes; eBay reported compliance with debt covenants.
- Key business risks include intense competition, changing consumer behavior and mobile commerce, execution of technology upgrades, fraud and transaction losses, foreign-exchange exposure, and regulatory requirements affecting Payments and consumer credit. Bill Me Later also depends on an unaffiliated issuing bank and exposes eBay to consumer-credit losses and funding needs.
- Legal risks include intellectual-property and counterfeit-goods disputes, privacy and data-security matters, and regulatory proceedings. The filing says legal accruals for matters where loss was considered probable were not material for the first half; for certain proceedings, potential non-monetary remedies and related losses could not be estimated.
- Gross unrecognized tax benefits were $367M at June 30. The company said tax audits and settlement discussions could significantly change tax reserves within 12 months, but it could not estimate the full range of possible adjustments.
- Approximately $14B of unused Bill Me Later credit lines were available to customers. This is a contingent exposure rather than an amount expected to be drawn in full; eBay purchases receivables after the bank extends credit and bears related default risk.
Investor verification checklist
- Verify the drivers of Payments’ lower take rate and rising transaction-loss provision, and whether credit and fraud metrics continued to change.
- Assess whether Marketplaces GMV growth translated into sustained revenue and margin improvement, including the effects of seller discounts and buyer-protection claims.
- Review Bill Me Later delinquency, charge-off, underwriting and funding trends, along with reliance on its issuing bank and payment-processing vendors.
- Track Enterprise platform migration delays, client retention, service-level exposure and segment margins.
- Monitor tax audit settlements, unrecognized tax benefits and potential cash-tax consequences of foreign cash repatriation.
- Follow significant litigation and regulatory developments, especially intellectual-property, payments, privacy and consumer-credit matters.
- Distinguish customer funds and overseas cash from unrestricted domestic liquidity when evaluating the company’s ability to fund repurchases and investment.