eBay Inc. 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011. eBay operates Marketplaces, Payments (PayPal and Bill Me Later) and, following its June 17 acquisition, GSI. Results include GSI only from its acquisition date.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net revenue | $2.966 billion | $2.249 billion | $8.272 billion | $6.661 billion |
| Gross profit | $2.046 billion | $1.609 billion | $5.846 billion | $4.799 billion |
| Operating income | $537 million | $490 million | $1.620 billion | $1.463 billion |
| Net income | $491 million | $432 million | $1.250 billion | $1.242 billion |
| Diluted EPS | $0.37 | $0.33 | $0.95 | $0.94 |
- Q3 revenue rose 32%; management attributed growth chiefly to PayPal net total payment volume (TPV) growth of 31%, Marketplaces GMV excluding vehicles growth of 16%, favorable currency movements and GSI. For the nine-month period revenue rose 24%, while net income was nearly flat.
- Q3 operating margin fell to 18% from 22%, reflecting acquisitions and business mix, partly offset by productivity gains. Gross margin was approximately 69.0%, versus 71.5% a year earlier. Q3 diluted EPS increased by $0.04.
- Q3 segment revenue: Marketplaces $1.653 billion, up 17%; Payments $1.107 billion, up 32%; GSI $203 million for the partial-period contribution. Segment operating income was $637 million, $216 million and $6 million, respectively.
- For the first nine months, operating cash flow was $2.291 billion, versus $1.892 billion. Capital expenditures were $672 million, yielding company-defined free cash flow of approximately $1.620 billion. Q3 operating cash flow was approximately $809 million, versus $747 million.
- At September 30, cash and cash equivalents were $2.999 billion; cash, time deposits and fixed-income securities totaled approximately $5.8 billion, compared with $7.8 billion at year-end 2010. Current assets were $9.762 billion and current liabilities $6.145 billion.
- Total debt was $2.544 billion, including $1.016 billion current debt and $1.528 billion long-term debt. Commercial paper outstanding was $1.0 billion at a weighted average rate of 0.17%; $0.8 billion of credit-agreement capacity remained available for other permitted purposes. eBay reported covenant compliance.
Material changes and unusual items
- eBay completed ten acquisitions in the first nine months, including GSI, brands4friends, GittiGidiyor, Zong and Magento. Acquisition cash outflows were $3.155 billion; goodwill increased to $8.342 billion and net intangible assets to $1.453 billion.
- In connection with acquiring GSI, eBay divested businesses to Kynetic for a note with a $467 million face value, recorded at $286.8 million fair value, and recognized a $256.5 million loss. The note matures in December 2018 and bears interest at three-month LIBOR plus 1.10%; repayment depends on the borrower’s financial performance.
- Q3 interest and other income included acquisition-related remeasurement gains; the nine-month total included gains of $73.4 million. These gains helped support reported earnings.
- After quarter-end, Microsoft completed its Skype acquisition on October 13, 2011. eBay received approximately $2.3 billion for its 30% interest and expected to recognize a pre-tax gain of approximately $1.7 billion in Q4 2011.
- Cash and cash equivalents declined by $2.578 billion during the first nine months, principally reflecting acquisitions and other investing activity. eBay also repurchased $814 million of stock and had approximately $1.13 billion remaining under its authorization.
Outlook, commentary and risks
Management expected Q4 results to be led by continued strength in Payments and Marketplaces, with GSI contributing to revenue growth. It planned continued investment in growth and innovation and further strategic acquisitions. No specific numeric operating guidance was provided in the supplied filing text. Management stated that existing liquidity, operating cash generation, borrowing capacity and capital-market access should fund foreseeable operating needs, capital expenditures, Bill Me Later receivables and repurchases.
- Key operating risks include competition and slowing growth in established Marketplaces, changes to seller policies and fees, transaction fraud and protection-program costs, foreign-exchange exposure, and dependence on consumer spending.
- Payments and Bill Me Later face regulatory and licensing risks, reliance on third-party banks and payment processors, funding needs, and consumer credit losses. Approximately 90% of Bill Me Later receivables were current; the weighted-average borrower FICO score was 697. The company bears loss risk on purchased receivables.
- GSI’s platform enhancement and client migrations had been delayed into 2012; further delay, cost overruns or failure to meet client service commitments could harm the business.
- Legal exposures include European trademark and counterfeit-goods disputes, including French injunctions and appeals, and Korean litigation by users relating to a 2008 data breach. Management said probable legal accruals were not material, but could not estimate potential non-monetary remedies in disclosed matters.
- Foreign exchange movements increased Q3 revenue by approximately $85 million and nine-month revenue by approximately $214 million versus prior-year periods. They also contributed to substantial volatility in other comprehensive income; Q3 comprehensive income was a loss of $127 million despite positive net income.
Important facts for investors to verify
- How much of revenue and operating performance growth reflects organic activity versus acquisitions and currency effects, particularly the partial-period GSI contribution.
- Whether GSI’s platform migration, client retention and integration progress meet management’s expectations, and whether the Kynetic note is collectible.
- Trends in Payments take rates, transaction losses and Bill Me Later credit quality, funding requirements and charge-offs.
- The sustainability of operating margins amid investment, acquisition-related amortization and a growing mix of lower-margin businesses.
- Available liquidity after acquisitions, the use of commercial paper, and the timing and amount of the expected Skype proceeds and gain.
- Developments in material litigation, tax examinations and payment-services regulation that could require business changes or create costs beyond recorded accruals.