eBay Inc. 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
eBay operates three segments: Marketplaces (eBay sites, classifieds and StubHub), Payments (PayPal and Bill Me Later), and Enterprise (ecommerce technology, fulfillment and marketing services for retailers). At year-end, Marketplaces reported more than 128 million active users and Payments 143 million active registered accounts. In December 2013, eBay acquired mobile-payments company Braintree for approximately $713 million.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenue | $16.047 billion | $14.072 billion | +14% |
| Gross profit | $11.011 billion | $9.856 billion | +12% |
| Operating income | $3.371 billion | $2.888 billion | +17% |
| Net income | $2.856 billion | $2.609 billion | +9% |
| Diluted EPS | $2.18 | $1.99 | +10% |
| Cash from operations | $4.995 billion | $3.838 billion | +$1.157 billion |
Gross margin was approximately 68.6%, down from 70.0%; operating margin was approximately 21% in both years. Transaction and loan loss provision rose 36% to $791 million, or 4.9% of revenue versus 4.1%. The effective tax rate increased to 18% from 15%.
- Marketplaces: Revenue rose 12% to $8.284 billion; GMV increased 11% to $83.330 billion. Segment operating income was $3.351 billion, up from $2.943 billion.
- Payments: Revenue rose 19% to $6.628 billion; net total payment volume (TPV) rose 24% to $179.663 billion. Merchant Services TPV increased 29%; on-eBay TPV increased 14%. Segment operating income rose to $1.588 billion from $1.359 billion.
- Enterprise: Revenue increased 3% to $1.112 billion, while Merchandise Sales increased 14% to $4.180 billion. Segment operating income declined to $91 million from $128 million, reflecting a lower take rate and investment in commerce technologies.
Fourth quarter: Revenue was $4.530 billion, gross profit $3.081 billion, net income $850 million and diluted EPS $0.65. Q4 2012 revenue was $3.992 billion, net income $751 million and diluted EPS $0.57. Q4 2013 included a $75 million gain on the sale of RueLaLa and ShopRunner investments.
Cash, debt and liquidity
- Cash and cash equivalents were $4.494 billion, versus $6.817 billion at year-end 2012. Short- and long-term investments totaled $9.502 billion; working capital was $10.644 billion.
- Operating cash flow was $4.995 billion. Capital expenditures were $1.250 billion, implying approximate operating cash flow less capital expenditures of $3.745 billion.
- Investing activities used $6.012 billion, including $7.505 billion in investment purchases, $1.250 billion in property and equipment, $794 million net investment in consumer loan receivables, and $869 million net cash paid for acquisitions.
- Total debt was $4.123 billion, principally senior notes; there were no commercial paper borrowings or revolver borrowings outstanding. The company reported compliance with debt covenants.
- Management cited $12.8 billion in cash, cash equivalents and short- and long-term non-equity investments, including approximately $9.7 billion held in foreign operations, and said available resources and expected cash generation should fund needs for the foreseeable future. Repatriation could trigger additional U.S. taxes.
- PayPal customer funds are reflected with corresponding customer liabilities on the balance sheet; these balances should not be treated as unrestricted corporate liquidity.
Changes, outlook and notable items
- Revenue growth was broad-based, led by Payments. Payments’ take rate declined as larger merchants, which generally pay lower rates, represented more volume. Enterprise margins weakened materially.
- Management described ongoing investment in mobile, platform, search, customer support and omnichannel commerce. Mobile commerce volume across eBay platforms exceeded $22 billion in 2013, up more than 70%; PayPal mobile TPV exceeded $27 billion.
- No specific numerical 2014 revenue or earnings guidance is provided in the filing. Management expects normal consumer seasonality and says Enterprise revenue is disproportionately concentrated in the holiday fourth quarter.
- eBay repurchased $1.343 billion of stock in 2013. In January 2014, the board authorized an additional $5 billion repurchase program, on top of approximately $640 million remaining under the prior authorization. eBay stated it had never paid cash dividends and did not anticipate doing so in the foreseeable future.
- Unusual year-over-year comparisons include the approximately $1.7 billion Skype sale gain in 2011 and a $118 million divestiture gain in 2012. The 2013 results include a $75 million gain on the sale of RueLaLa and ShopRunner investments; these items affect comparisons of non-operating income and EPS.
Risks, contingencies and items to monitor
- Competition and execution: Intense competition in marketplaces, digital payments and retail services; changing buyer expectations for shipping, returns and ease of use; and risk that marketplace policy changes alienate sellers.
- Enterprise platform migration: Client migrations to the new commerce technology platform were delayed into 2014 and beyond. Further delays, service issues or client penalties could hurt retention and results.
- Payments, credit and regulation: Payments faces licensing, consumer-protection, anti-money-laundering and card-network requirements. Bill Me Later depends on partner banks, and eBay bears most losses on purchased receivables; its 2013 net charge-off rate was approximately 5.67%. The CFPB issued investigative demands concerning Bill Me Later, and eBay said it was cooperating.
- Losses and fraud: Payments transaction losses, including direct losses and buyer-protection payouts, were $369 million, or 0.21% of net TPV. Total transaction and loan loss provision increased substantially year over year.
- Legal matters: The filing describes intellectual-property and counterfeit-goods disputes, Korean litigation related to a 2008 data breach, and a pending U.S. Department of Justice antitrust case involving employee recruiting practices. The company said probable legal accruals were not material, but it could not estimate potential effects of some non-monetary remedies.
- Other exposures: Foreign exchange movements, cybersecurity and service outages, privacy regulation, indirect and income-tax examinations, and the ability to fund growth in consumer receivables. Foreign currency movements positively affected 2013 revenue by approximately $24 million versus 2012.
Most important facts for investors to verify
- Whether growth in PayPal TPV and Marketplaces GMV converts into sustained revenue and earnings growth as take rates and business mix change.
- Whether the Enterprise platform migration proceeds successfully and the segment’s operating margin stabilizes.
- Trends in transaction losses, Bill Me Later delinquencies and charge-offs, and the funding and bank-partner arrangements supporting consumer credit.
- How much of reported cash and investments is available for corporate use after accounting for customer funds, foreign-location balances and potential repatriation taxes.
- The expected pace and funding of the expanded $5 billion share repurchase authorization, alongside acquisition spending and capital investment.
- Developments in CFPB inquiries, antitrust and intellectual-property litigation, and the potential business impact of non-monetary remedies.