eBay Inc. — FY 2010 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2010; it also provides unaudited fourth-quarter results. eBay operated Marketplaces and Payments segments. Skype was sold in November 2009 and is not consolidated in 2010 results. Figures below are in U.S. dollars.
Financial performance and key metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net revenue | $9.156 billion | $8.727 billion |
| Gross profit / margin | $6.592 billion / 72.0% | $6.248 billion / 71.6% |
| Operating income / margin | $2.054 billion / 22% | $1.457 billion / 17% |
| Net income | $1.801 billion | $2.389 billion |
| Diluted EPS | $1.36 | $1.83 |
| Cash from operations | $2.746 billion | $2.908 billion |
| Capital expenditures | $724 million | $567 million |
- Fourth-quarter 2010 revenue was $2.495 billion, gross profit $1.793 billion, and net income $559 million. In fourth-quarter 2009, these were $2.371 billion, $1.700 billion, and $1.355 billion, respectively; 2009 net income included the Skype-sale gain.
- Revenue rose 5% reported, or 13% excluding Skype revenue in 2009. Payments revenue increased 23% to $3.436 billion; Marketplaces revenue increased 8% to $5.721 billion.
- Marketplaces GMV was $61.8 billion, up 8%; GMV excluding vehicles grew 11%, while vehicle GMV declined 6%. Payments net total payment volume rose 28% to $92.0 billion.
- At year-end, cash and cash equivalents were $5.577 billion; short- and long-term investments totaled $3.537 billion. Working capital was $6.549 billion. Management reported aggregate cash, cash equivalents, and investments of approximately $7.8 billion.
- Total debt was $1.794 billion: $300 million commercial paper and approximately $1.494 billion long-term notes. The company had a $1.8 billion revolving facility with no borrowings outstanding; $800 million was available for general purposes after reserving capacity to backstop commercial paper.
- Operating cash flow less property and equipment purchases was approximately $2.022 billion, using the company’s stated free-cash-flow definition. Operating cash flow declined from 2009, primarily reflecting higher cash taxes.
- Bill Me Later net charge-off rate improved to 7.71% from 10.66% in 2009. Payments transaction losses were $153.1 million, or 0.17% of net payment volume, versus $180.9 million, or 0.25%, in 2009.
Material changes and unusual items
- Operating margin improved to 22% from 17%, primarily due to the absence of the $343.2 million Skype-related legal settlement charge recorded in 2009 and lower acquired-intangible amortization.
- Net income and diluted EPS fell year over year because 2009 included a $1.4 billion gain on the Skype sale, partly offset by the related settlement charge. The 2010 income statement also included a $22.8 million gain related to repayment of Skype debt securities and its note.
- The effective tax rate was 14%, compared with 17% in 2009, primarily due to settlement of multiple uncertain tax positions. Tax rulings in Singapore and Switzerland reduced 2010 tax expense by $284 million, or about $0.21 per diluted share.
- eBay repurchased approximately $712.8 million of stock during 2010 and authorized an additional $2.0 billion repurchase program in September. It issued $1.5 billion of senior notes and began a commercial-paper program.
- International operations generated approximately 54% of revenue. Foreign currency movements reduced 2010 revenue by $9.6 million versus 2009.
Outlook, management commentary, and risks
Management expected continued strong Payments performance from broader merchant coverage and increased checkout share, and solid Marketplaces performance in core markets, supported by progress in trust, value, and selection. It described its macroeconomic outlook as stable. The filing does not provide quantified revenue or earnings guidance.
- Management highlighted investments in search, catalog, mobile, platform technology, and user experience; fixed-price listings represented approximately 60% of eBay GMV in 2010.
- Key risks include intense competition and slower growth or market-share losses in mature Marketplaces markets; sensitivity to consumer spending and cross-border activity; foreign-exchange and interest-rate exposure; fraud, cybersecurity incidents, and service interruptions; and costs or losses from customer-protection programs.
- Payments faces significant regulatory and licensing uncertainty across jurisdictions. PayPal also relies on payment processors and banking partners. Bill Me Later depends on WebBank to originate credit and eBay bears losses on receivables it purchases.
- Material legal and regulatory matters include European luxury-brand and counterfeit-goods litigation, the pending appeal of a Korean data-breach case, and lawsuits alleging improper PayPal account restrictions or funds holds. The filing describes outcomes as uncertain.
- Bill Me Later receivables were $956 million net at year-end; eBay reported bearing default risk. The company also disclosed $8.3 billion of indefinitely reinvested foreign earnings and possible additional U.S. tax if repatriated.
- The company reported effective disclosure controls and internal control over financial reporting; its auditor issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether Payments growth and merchant-services expansion can continue while take rates are pressured by a shift to larger merchants.
- How Marketplaces changes to pricing, search, seller standards, and buyer protections affect GMV, seller participation, and margins.
- Bill Me Later credit quality, charge-offs, receivables funding needs, and continued access to its bank issuer and processing providers.
- Developments in major litigation and regulatory matters, including European marketplace liability, PayPal account practices, and the Korean data-breach appeal.
- The sustainability of the low effective tax rate, foreign tax rulings, and tax exposure associated with overseas earnings and ongoing examinations.
- Cash generation after capital expenditures, debt and commercial-paper refinancing needs, planned repurchases, and the availability of overseas cash for U.S. use.