Business context and reporting period
eBay Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Its single reportable segment includes Marketplace, StubHub and Classifieds. Unless stated otherwise, dollar amounts are in millions.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $2,649 | $2,498 | $7,869 | $7,220 |
| Income from operations | $556 | $574 | $1,541 | $1,601 |
| Operating margin | 21.0% | 23.0% | 19.6% | 22.2% |
| Net income | $721 | $520 | $1,770 | $1,584 |
| Diluted EPS | $0.73 | $0.48 | $1.76 | $1.45 |
| Operating cash flow | $560 | $877 | $1,427 | $2,158 |
- Q3 revenue increased 6% year over year, also 6% on an FX-neutral basis. Nine-month revenue increased 9% reported and 6% FX-neutral. International revenue was $1,565 in Q3, up 8% reported.
- Q3 total GMV rose 5% to $22,719; total transaction take rate increased to 9.19% from 9.08%. Marketplace revenue grew 6% and Classifieds marketing-services revenue grew 8% in the quarter.
- Q3 gross profit was $2,041; gross margin was approximately 77.0%, versus 77.7% a year earlier. Sales and marketing expense rose 18% to $852, contributing to lower operating income and margin.
- Q3 net income included a $313 gain on the Flipkart investment sale and a $126 gain from the warrant’s fair-value change. Nine-month interest and other, net also included a $266 gain on relinquishing the Giosis equity-method investment. These items materially lifted reported earnings relative to operating performance.
- Nine-month capital expenditures were $521; operating cash flow less capital expenditures was approximately $906, compared with approximately $1,684 in 2017. This is a simple derived measure, not a company-reported non-GAAP metric. The company cited a $738 adverse change in assets, liabilities and other items, net of acquisition effects, as a key operating-cash-flow use.
- At September 30, cash and cash equivalents were $2,086; short-term investments were $2,752 and long-term debt investments were $4,132. These totaled approximately $8,970, compared with approximately $11,309 at year-end 2017. Current assets were $6,963 and current liabilities $4,006.
- Total debt was $9,207, down from $10,015 at year-end 2017; $1,546 was classified as short-term debt. No commercial paper or credit-agreement borrowings were outstanding. The company reported covenant compliance.
Material changes versus comparable periods
- Revenue growth continued, but Q3 operating income fell 3% and operating margin declined by 2 percentage points. Nine-month operating income fell 4% despite 9% reported revenue growth.
- Net income increased 39% in Q3 and 12% for the first nine months, while operating income declined. Gains on investments and the warrant explain an important part of the divergence.
- Nine-month operating cash flow declined $731 year over year. Financing used $3,887, primarily for $2,991 of share repurchases and repayment of $750 of senior notes; the company repurchased 79 million shares during the period.
- In May, eBay acquired Giosis’s Japan business, including Qoo10.jp, for $306 cash and relinquished its existing Giosis investment. Preliminary purchase accounting recorded $532 of goodwill and $91 of acquired intangible assets.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified forward revenue or earnings guidance. Management said existing cash and investments, operating cash generation, borrowing capacity and capital-market access should fund operations, capital expenditures, debt repayment and repurchases for the foreseeable future.
- Management expects continued opportunistic and programmatic repurchases; $4,651 remained authorized at September 30. Repurchases may be limited or ended at any time.
- An October 11 favorable tax ruling is expected to produce a $389 income-tax benefit in Q4 2018. The company was still completing its U.S. tax-reform analysis and cautioned that adjustments to its provisional tax amounts could materially affect tax expense.
- The company announced an acquisition of UK classifieds site Motors.co.uk, expected to close in the first half of 2019 subject to approvals and customary conditions. Purchase price and financial impact were not yet estimable.
- A June workforce-reduction plan resulted in $84 of nine-month restructuring charges, primarily severance and benefits; the reduction was substantially completed in Q2.
- Key exposures include intense ecommerce competition, foreign-exchange movements, international and cross-border operating risks, privacy and cybersecurity regulation, taxes, litigation and StubHub ticket-resale regulation. The company said probable legal accruals were not material for the nine months; legal outcomes remain uncertain.
- Adoption of the lease-accounting standard in 2019 is expected to materially affect the balance sheet, principally through recognition of office and data-center lease assets and liabilities, but is not expected to materially affect the income statement or cash flows.
Important facts for investors to verify
- How much earnings growth is sustainable from core operations, excluding Flipkart, Giosis and warrant-related gains?
- Whether revenue, GMV and take-rate trends persist, particularly alongside higher marketing spending and weaker operating margins.
- What drove the $738 working-capital and other operating-cash-flow outflow, and whether cash conversion improves.
- Whether the expected $389 tax benefit is recorded in Q4 and whether remaining tax-reform estimates or audits cause further adjustments.
- How the Motors.co.uk acquisition and Giosis integration perform, and whether repurchases remain consistent with debt, liquidity and investment needs.
- Developments in material litigation, privacy and tax regulation, foreign-exchange exposure, and the company’s substantial debt obligations.