Business context and reporting period
eBay Inc.’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2009, compared with the corresponding 2008 periods. The company operated Marketplaces, Payments (PayPal and Bill Me Later), and Communications (Skype). In June it acquired 99% of Korean ecommerce marketplace Gmarket for approximately $1.2 billion. In September it agreed to sell the Skype companies in a transaction valuing Skype at $2.75 billion; eBay expected to retain an approximately 35% interest in the buyer.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net revenue | $2.238 billion | $2.118 billion | $6.356 billion | $6.505 billion |
| Gross profit / margin | $1.594 billion / 71.2% | $1.557 billion / 73.5% | $4.547 billion / 71.5% | $4.857 billion / 74.7% |
| Operating income / margin | $443 million / 19.8% | $524 million / 24.7% | $1.277 billion / 20.1% | $1.622 billion / 24.9% |
| Net income | $350 million | $492 million | $1.034 billion | $1.412 billion |
| Diluted EPS | $0.27 | $0.38 | $0.80 | $1.07 |
| Operating cash flow | $738 million | Not stated for the quarter | $2.137 billion | $2.198 billion |
Q3 revenue increased 6%, but operating margin contracted about five percentage points and diluted EPS fell 29%. Management attributed margin pressure to acquisition-related dilution, foreign exchange, and growth in lower-margin businesses; lower investment yields and a higher tax rate also weighed on EPS. The nine-month revenue decline reflected currency effects and weakness in Marketplaces.
For Q3, Marketplaces revenue declined 1% to $1.365 billion, Payments grew 15% to $688 million, and Communications grew 29% to $185 million. Total GMV rose 2% to $14.578 billion, including a 7% increase excluding vehicles; vehicle GMV fell 18%. Payments net TPV increased 19% to $17.686 billion, while SkypeOut minutes rose 44% to 3.103 billion.
At September 30, cash and cash equivalents were $2.558 billion, short-term investments $601 million, and long-term investments $479 million. Cash plus short- and long-term investments totaled approximately $3.638 billion. Current assets were $6.474 billion and current liabilities $3.647 billion. Credit-agreement borrowings were $200 million, with approximately $1.6 billion available; eBay reported covenant compliance. Nine-month investing cash use was $2.032 billion, primarily for Gmarket, investments, and capital expenditures. Cash declined $631 million from year-end 2008.
Material changes, outlook, risks, and unusual items
- Revenue growth was uneven: Q3 growth in Payments and Communications offset slight Marketplaces contraction, while nine-month revenue fell 2%. Currency movements reduced revenue by approximately $97 million in Q3 and $464 million year to date versus 2008.
- Gmarket added approximately $798 million of preliminary goodwill; its post-acquisition revenue and earnings were not material to the reported periods. Bill Me Later expanded Payments but increased loan-loss exposure and operating costs.
- The proposed Skype sale was expected to close in Q4 2009, subject to conditions including antitrust approvals. Management estimated a gain of approximately $1.0 billion and forecast Q4 revenue moderately stronger than Q3, supported by GMV/TPV momentum and holiday shopping. The forecast included Skype revenue through an assumed mid-quarter closing; expected Q4 net income to increase significantly, primarily because of the estimated sale gain.
- Bill Me Later’s loan portfolio was approximately $511.8 million; its Q3 credit loss rate was 11.53%. Management cited risks from recession-driven defaults, funding constraints, and reliance on CIT Bank and payment-processing providers.
- Restructuring charges were $12.7 million in Q3 and $36.9 million in the first nine months. The customer-service consolidation could affect approximately 1,100 employees, with estimated aggregate costs of $45–55 million and completion expected by mid-2010.
- Significant legal and regulatory exposures include the French luxury-brand ruling and injunction (approximately EUR 38.6 million damages, appealed), pending trademark and patent matters, approximately 144,000 Korean lawsuits related to a 2008 data breach, and Skype’s licensing dispute with Joltid. Tax authorities were examining multiple years and jurisdictions; unrecognized tax benefits were $828 million, with approximately $80 million of accrued interest and penalties.
- Other stated risks include economic weakness, competition and seller reaction to Marketplace changes, fraud and transaction losses, foreign exchange and interest-rate exposure, regulatory uncertainty for online payments and communications, and the possibility that the Skype sale could be delayed or fail to close. eBay reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Skype transaction closed on schedule, its final proceeds and gain, and the valuation and liquidity of eBay’s retained 35% interest.
- Bill Me Later loan-loss trends, portfolio funding capacity, and reliance on CIT Bank and a concentrated payment-processing vendor.
- Whether Marketplace activity and monetization improve, particularly vehicle GMV, seller retention, and the effects of discounts and buyer incentives.
- Developments in the French injunction, Korean data-breach claims, Joltid litigation, and outstanding tax examinations.
- Whether reported cash is readily deployable: approximately $2.4 billion was held outside the U.S. and could incur additional U.S. taxes if distributed; customer funds and related balances should also be distinguished from corporate liquidity.