eBay Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. Amounts are U.S. dollars; financial statements are unaudited. eBay operated Marketplaces and Payments. Skype was sold in November 2009, so its results are absent from 2010 but included in 2009 comparisons through the sale date.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Change |
|---|---|---|---|
| Net revenue | $2.215 billion | $2.098 billion | +6% |
| Gross profit | $1.600 billion | $1.506 billion | +6% |
| Gross margin | 72.2% | 71.8% | +0.4 percentage points |
| Operating income | $484.6 million | $411.7 million | +18% |
| Operating margin | 22% | 20% | +2 percentage points |
| Net income | $412.2 million | $327.3 million | +26% |
| Diluted EPS | $0.31 | $0.25 | +$0.06 |
For the six months, revenue was $4.411 billion (+7%), operating income $973.2 million (+17%), net income $809.8 million (+18%), and diluted EPS $0.61 versus $0.53. Six-month gross margin was approximately 72.3%, compared with 71.7%.
Segment and activity indicators: Q2 Marketplaces revenue rose 11% to $1.398 billion and Payments revenue rose 22% to $817.0 million. GMV excluding vehicles increased 13% to $12.531 billion; total GMV increased 10% to $14.720 billion. Payments net total payment volume rose 28% to $21.394 billion. Merchant Services net TPV grew 43%. Management attributed growth to Payments merchant adoption and to Marketplaces, including Gmarket, higher GMV and StubHub.
Cash flow and liquidity: Operating cash flow for the first six months was $1.145 billion, down from $1.399 billion; investing cash outflow was $835.6 million, and financing cash inflow was $50.4 million. Cash increased $37.6 million to $4.037 billion, after a $321.7 million adverse foreign-exchange effect. At June 30, cash and non-equity investments totaled $5.6 billion; approximately $4.4 billion was held outside the U.S. Current assets were $8.675 billion and current liabilities $3.564 billion. No amounts were drawn on the $1.8 billion revolving credit facility, and eBay reported covenant compliance. The filing reports no material off-balance-sheet arrangements.
Debt and other balance-sheet items: No outstanding borrowings were reported under the revolving credit facility. Total liabilities were $4.578 billion and stockholders’ equity $14.169 billion. Loans and interest receivable were $647.3 million. Goodwill fell to $5.922 billion, primarily due to foreign-currency translation adjustments.
Comprehensive income: Despite Q2 net income of $412.2 million, comprehensive loss was $101.2 million, principally reflecting a $536.7 million foreign-currency translation loss. For the first six months, comprehensive income was $152.9 million.
Changes, outlook and material items
- Q2 Payments segment margin increased 3.8 percentage points, supported by productivity and lower transaction-loss rates, partly offset by lower take rates. Marketplaces segment margin declined 2.2 percentage points, which management attributed mainly to Gmarket and investment in trust, value and selection.
- Management said Q2 operating-margin expansion reflected productivity gains and lower acquired-intangible amortization, partly offset by growth in lower-margin businesses. Transaction and loan-loss provisions were $92.0 million in Q2, approximately flat year over year; the six-month provision rose 14% to $198.1 million.
- For the second half of 2010, management expected a stronger U.S. dollar to weigh on revenue and diluted EPS. It expected Payments strength to partly offset this effect, international Marketplaces growth to be offset by slower U.S. and cross-border growth, and continued focus on operational efficiency. No numeric full-year forecast is provided in this filing text.
- Restructuring of customer-service facilities, potentially affecting about 1,000 employees, was expected to cost $45–$50 million in total and be completed by year-end 2010. Cumulative charges were $44.4 million; $17.4 million was recorded in the first half of 2010.
- Skype repaid its $125 million subordinated note and $50 million senior debt securities in March. eBay recorded a $22.8 million gain, then reinvested approximately $91.4 million in new five-year Skype senior debt securities.
- Unrecognized tax benefits were $873.4 million at June 30, with approximately $93.8 million of accrued interest and penalties. Tax authorities were examining tax years 2003–2008; the company said the amount of possible changes over the next 12 months could not be estimated practicably.
Risks and contingencies
- Legal exposure: French courts had awarded approximately €38.6 million in damages in a luxury-brand case and €1.7 million relating to alleged injunction noncompliance; an appeal decision was expected September 3, 2010. eBay warned that such disputes could require business changes, raise costs or reduce revenue. The Tiffany ruling was upheld on key trademark claims, while a false-advertising issue was remanded. L’Oréal matters before the European Court of Justice were unresolved.
- Payments regulation and litigation: Two putative U.S. class actions filed in Q2 alleged Electronic Fund Transfer Act/Regulation E violations or improper account restrictions and fund holds. eBay also identified regulatory, licensing, anti-money-laundering and consumer-protection risks across PayPal and Bill Me Later.
- Bill Me Later: The business depended on an unaffiliated issuing bank and was transitioning from CIT Bank to another institution; failure to complete the transition by September 30, 2010 could interrupt service. Effective July 1, $5.7 billion of unused customer credit lines were available through CIT Bank, subject to review and cancellation. The company cited credit-loss, funding, regulatory and litigation risks.
- Currency and operating risks: A substantial share of revenue was international. Currency changes, especially U.S.-dollar strength, could reduce translated revenue and earnings and weaken cross-border trade. Other highlighted risks included competition, user activity and seller response to policy changes, fraud and transaction losses, security breaches, service interruptions, and litigation or regulatory changes affecting online intermediaries.
- Data breach contingency: Approximately 147,000 users of eBay’s Korean subsidiary had sued over a 2008 data breach. A Korean trial court found no liability in January 2010; the decision was appealed.
Investor verification priorities
- Confirm the sustainability and drivers of Payments growth, Merchant Services TPV, take rates and segment margins.
- Assess the effect of stronger-dollar scenarios on second-half revenue, earnings and cross-border activity; distinguish currency impacts from underlying growth.
- Track operating cash flow and working-capital movements, capital spending, and the location and tax implications of overseas cash.
- Monitor Bill Me Later’s bank transition, receivable performance, funding capacity and regulatory requirements.
- Follow the French luxury-brand appeal, PayPal class actions, tax examinations and related potential costs or operating restrictions.
- Consider the comparability limitation from Skype’s absence in 2010 and inclusion in 2009 results, as well as Gmarket’s contribution to growth and margin changes.