EBAY INC quarterly report, Q1 FY2015

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Business context and reporting period

eBay Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015. Its three reportable segments were Marketplaces, Payments (PayPal) and Enterprise. The company was preparing to separate PayPal as a standalone public company, targeted for the second half of 2015, subject to conditions, and was evaluating strategic options for eBay Enterprise.

Financial results and key metrics

  • Revenue: $4.448 billion, up 4% year over year. International revenue was $2.299 billion. Foreign exchange movements reduced revenue by about $234 million, including a $50 million benefit from hedging.
  • Profitability: Gross profit was $2.998 billion. Operating income declined to $732 million from $878 million; operating margin fell to 16% from 21%. Net income was $626 million, or $0.51 diluted EPS, versus a $2.326 billion net loss, or $1.82 loss per share, in Q1 2014.
  • Cash flow: Operating cash flow was $1.151 billion, compared with $1.174 billion. Investing activities used $724 million; financing activities used $985 million, including $1.0 billion of share repurchases. Cash and cash equivalents ended the quarter at $5.473 billion, down $855 million from year-end, including a $297 million adverse currency effect.
  • Liquidity and debt: Management reported $14.1 billion of cash, cash equivalents and short- and long-term non-equity investments. Total debt was $7.663 billion, comprising $868 million short-term and $6.795 billion long-term. No commercial paper or credit-agreement borrowings were outstanding; $1 billion of credit-agreement capacity was available for other purposes. Management said resources and expected cash generation should meet foreseeable needs.
  • Segments: Marketplaces revenue was $2.069 billion, down 4%, with operating income of $811 million versus $856 million; GMV fell 2% to $20.195 billion. Payments revenue was $2.108 billion, up 14%, with operating income of $533 million versus $475 million; Net TPV rose 18% to $61.413 billion. Enterprise revenue was $288 million, up 7%, with operating income of $14 million versus $13 million; Gross Merchandise Sales grew 8% to $1.014 billion.

Material changes versus the prior period

  • Payments growth offset weaker Marketplaces revenue, which was pressured by foreign exchange and lower GMV. Payments Net TPV grew faster than revenue, partly because of a lower take rate and increased Merchant Services mix.
  • General and administrative expense rose 43% to $665 million, principally reflecting the PayPal separation and workforce restructuring. Restructuring charges were $119 million; separation costs were about $87 million in the quarter.
  • Provision for transaction and loan losses increased 29% to $264 million. Stock-based compensation increased to $185 million from $149 million.
  • The comparison in net income is heavily affected by Q1 2014’s $3.199 billion tax provision, primarily an accrual on $9 billion of previously undistributed foreign earnings. The 2015 effective tax rate was 15.4%; excluding that prior-year charge, the 2014 rate would have been 18.3%.

Outlook, risks and unusual items

  • eBay expected to incur more PayPal separation costs during 2015; estimated additional costs were expected to exceed $135 million. The planned separation remained subject to market, regulatory and other conditions, and the company expected to contribute approximately $3.5 billion of cash to PayPal before separation.
  • eBay Enterprise strategic options included a possible sale, partial sale or IPO. Its interim goodwill assessment found estimated fair value only about 8% above carrying value; a disposition below carrying value could trigger impairment.
  • PayPal had $3.6 billion of outstanding consumer receivables and approximately $21.5 billion of unused credit available to accountholders. An April arrangement to sell about $700 million of receivable participations was expected to close in Q2 2015, subject to conditions.
  • Significant regulatory and legal matters included CFPB inquiries into PayPal Credit, with a possible lawsuit indicated as early as Q2 2015; ongoing OFAC inquiries (a March settlement had no material financial impact); and litigation related to the 2014 Marketplaces data breach. The filing says reasonably possible losses from disclosed proceedings were generally not material, but outcomes are uncertain.
  • After quarter-end, eBay completed the approximately $285 million Paydiant acquisition and acquired CyActive; the filing does not state a clear purchase price for CyActive.
  • Other key exposures include foreign currency volatility, payment and consumer-credit losses, cybersecurity and service interruptions, extensive payments regulation, and potential credit-rating pressure associated with the planned separation. No specific revenue or EPS guidance is provided.

Important facts for investors to verify

  1. Whether the PayPal separation proceeds on the expected timetable and terms, and its final capital structure, cash contribution and total separation costs.
  2. Whether Payments growth and take-rate trends sustain margins, and whether Marketplaces GMV and revenue stabilize after foreign-exchange effects.
  3. Credit quality and loss trends in PayPal’s consumer and merchant receivables, including completion and economics of the planned participation sale.
  4. Whether Enterprise’s strategic process results in a transaction or goodwill impairment, given the limited valuation headroom disclosed.
  5. Developments in CFPB and other regulatory matters, the data-breach litigation, and any related costs or operating restrictions.
  6. Cash deployment and debt management, including remaining share-repurchase authorization, 2015 debt maturities and credit-rating changes.