eBay Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. eBay operates Marketplaces, Payments (PayPal and Bill Me Later), and Communications (Skype). The filing was signed July 28, 2009.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $2.098B | $2.196B | $4.119B | $4.388B |
| Gross profit | $1.506B | $1.634B | $2.953B | $3.300B |
| Operating income | $411.7M | $545.4M | $834.5M | $1.098B |
| Net income | $327.3M | $460.3M | $684.5M | $920.1M |
| Diluted EPS | $0.25 | $0.35 | $0.53 | $0.69 |
- Q2 revenue fell 4% and six-month revenue fell 6% year over year. Q2 gross margin was approximately 71.8%, down from 74.4%; operating margin was approximately 19.6%, down from 24.8%. Management attributed lower operating margin and EPS in part to foreign exchange, business mix, and acquisition dilution.
- Q2 segment revenue: Marketplaces $1.259B, down 14%; Payments $669.3M, up 11%; Communications $170.0M, up 25%. Marketplaces GMV fell 14% to $13.427B; Payments net TPV rose 12% to $16.705B.
- Foreign currency movements reduced Q2 revenue by about $178.3M and six-month revenue by about $369.9M; management reported a $175.7M adverse effect on six-month operating income.
- Six-month operating cash flow was $1.399B, versus $1.505B. Investing cash outflow was $1.428B, including $1.209B for Gmarket and $219.4M of net property and equipment purchases. Financing cash outflow was $583.7M, primarily repayment of $600M under the credit line. Cash declined $615.3M to $2.574B. Q2 operating cash flow was $730.7M and capital expenditures were $128.5M.
- At June 30, cash and cash equivalents were $2.574B; short- and long-term investments totaled about $560.9M. Current assets were $6.250B and current liabilities $3.730B. Credit-agreement borrowings were $400M, with approximately $1.4B available at a 0.5% stated rate; eBay said it was covenant-compliant. The filing reports no material off-balance-sheet arrangements.
Material changes and notable items
- eBay acquired 99% of South Korean marketplace Gmarket in June for approximately $1.2B cash. Preliminary purchase accounting included $797.9M goodwill and acquired identifiable intangibles; Gmarket’s reported-period contribution was not significant. The purchase-price allocation remained preliminary.
- Payments growth reflected Merchant Services; its net TPV grew 26%. Communications growth reflected higher SkypeOut minutes, up 57% in Q2. Marketplaces weakness included a 32% decline in vehicle-category GMV; excluding vehicles, GMV fell 10%.
- eBay announced plans to separate Skype into an independent company. It also announced consolidation of its North American customer-service facilities, including closure of the Vancouver facility employing about 700 people. Estimated costs were $20M–$25M, with $14.4M recorded in Q2; completion was expected by the end of Q3.
- Bill Me Later’s consumer loan portfolio was approximately $553.4M at June 30; its Q2 charge-off rate was 11.08%. The business depends on CIT Bank to originate consumer credit.
Outlook, risks, and contingencies
- Management expected Q3 2009 revenue and net income to be similar to Q2. A full quarter of Gmarket and modest foreign-exchange benefit were expected to be offset by lower take rates, continued advertising softness, and seasonality. Management saw signs of stabilization and slight acceleration in some Marketplaces metrics, but expected continued weakness in vehicles and continued PayPal growth.
- Key litigation and legal exposures include the French ruling awarding approximately EUR 38.6M and imposing an injunction concerning specified luxury-brand cosmetics and perfumes; appeals were pending. The Tiffany appeal, other trademark and counterfeit-goods cases, patent disputes, and approximately 143,000 Korean user lawsuits related to a 2008 data breach were also disclosed.
- Skype faced a dispute with Joltid over licensed peer-to-peer software. Trial was scheduled for June 2010; eBay warned that losing the right to use the technology without a viable alternative could severely impair Skype’s operations.
- Risk factors include the recession and weaker consumer spending, competitive and seller responses to Marketplace policy/pricing changes, transaction and credit losses, fraud and data security, foreign-exchange exposure, regulation of payments and online services, and acquisition integration. CIT Group’s announced restructuring created potential risk to Bill Me Later’s bank-funding arrangement.
- Unrecognized tax benefits were $786.6M at June 30, with accrued interest and penalties of approximately $73.1M; tax examinations were ongoing. eBay stated that approximately $2.2B of cash was held outside the U.S. and repatriation could trigger additional U.S. taxes in some circumstances.
Important facts for investors to verify
- Whether Marketplaces GMV, especially vehicles and established international markets, stabilizes and how seller incentives and policy changes affect activity and take rates.
- Whether PayPal growth and Bill Me Later credit performance, funding availability, and dependence on CIT Bank remain sustainable.
- The realized financial contribution and final purchase accounting for Gmarket, plus the costs and execution of the planned Skype separation and restructuring.
- Developments in the French injunction and damages, Korean data-breach claims, and Skype’s Joltid litigation.
- Subsequent foreign-exchange effects, cash generation, and any changes in credit-line availability or tax contingencies.