eBay Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. eBay operates Marketplace, StubHub and Classifieds as one reportable segment. Figures are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $2,409 | $2,217 | $6,954 | $6,584 |
| Gross profit | $1,853 | $1,719 | $5,322 | $5,116 |
| Operating income | $578 | $542 | $1,602 | $1,687 |
| Net income | $523 | $413 | $1,585 | $1,330 |
| Diluted continuing-operations EPS | $0.48 | $0.36 | $1.45 | $1.16 |
| Operating cash flow | $877 | $802 | $2,158 | $2,207 |
- Q3 revenue rose 9% reported and 8% FX-neutral; nine-month revenue rose 6% reported and 7% FX-neutral. Q3 gross margin was approximately 76.9%, versus 77.5%; operating margin was 24% in both periods.
- Q3 Marketplace GMV increased 9% to $20.5 billion; StubHub GMV increased 2% to $1.16 billion. Classifieds marketing-services revenue rose 19% to $235 million, led primarily by Germany.
- For the first nine months, net cash from investing activities was $(1,510) million and financing activities $(888) million. Cash and cash equivalents ended at $1,760 million, down $56 million from year-end 2016.
- At September 30, cash, cash equivalents and short- and long-term non-equity investments totaled approximately $11.4 billion; total debt was approximately $10.0 billion. The company reported $749 million of short-term debt and $9,249 million of long-term debt.
Changes, transactions and unusual items
- Q3 operating income grew 7%, but nine-month operating income fell 5% despite higher revenue, as operating expenses increased 8% for the nine-month period.
- Q3 net income included a $167 million gain on the sale of eBay India, recorded in interest and other, net. eBay received a 5.44% Flipkart interest in exchange for the India business and a $500 million cash investment; the investment was recorded at $725 million.
- Nine-month tax results were materially affected by legal-entity realignment: eBay recognized a $695 million tax benefit in Q1 and a $376 million noncash tax charge from foreign-exchange remeasurement of deferred tax assets. The nine-month effective tax rate was 8%, versus 19% a year earlier; Q3 rates were 25% and 22%, respectively.
- Q3 cost of revenue increased 12%, partly reflecting Korea first-party inventory and higher site-operations investment. Transaction-loss provision rose 24% in Q3, primarily due to customer-protection costs and uncollectible accounts.
- The company repurchased $1.8 billion of shares during the first nine months and had approximately $2.6 billion remaining under its repurchase authorizations. It issued $2.5 billion of senior notes during Q2 and repaid $1.45 billion of notes that matured in Q3.
Outlook, risks and controls
- The filing provides no specific revenue or earnings guidance. Management said it expects cash, investments, operating cash generation, borrowing availability and capital-market access to fund operations, capital expenditures, debt repayment and repurchases for the foreseeable future. It expects opportunistic repurchases to continue, subject to conditions.
- Management expects tax-related cash benefits from the foreign tax-basis step-up to continue for more than 10 years, subject to foreign-platform performance; the legal-structure realignment is expected to extend into 2018. Adoption of the new revenue-recognition standard was planned for Q1 2018 using full retrospective application; the impact was still being quantified.
- Disclosure controls were not effective at September 30, 2017 because of a material weakness in tax-accounting controls related to the 2016 legal-structure realignment. Remediation procedures were operating, but testing was ongoing; management’s goal was remediation by year-end 2017.
- Principal disclosed risks include intense commerce competition, international and currency exposure, privacy and cybersecurity, regulation and litigation, transaction fraud and customer-protection costs, and substantial debt. The company reported compliance with debt covenants and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the tax-control material weakness was fully remediated and whether any related tax estimates or disclosures changed subsequently.
- The recurring earnings and cash-flow effects of the $167 million India-sale gain, the $695 million tax benefit and the $376 million deferred-tax remeasurement charge.
- Growth and margins excluding currency movements, the Flipkart transaction, and other one-time or tax-related items.
- Debt maturities, interest costs and the balance between share repurchases, investment spending and liquidity, including the location and tax accessibility of overseas funds.
- Whether customer-protection losses, competition, legal or regulatory matters, and cybersecurity risks materially affected later results.