eBay Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Comparisons are with the corresponding 2011 periods unless stated otherwise. eBay reports Marketplaces, Payments and GSI segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $3.398B | $2.760B | $6.675B | $5.306B |
| Gross profit | $2.411B | $1.987B | $4.705B | $3.804B |
| Income from operations | $695M | $519M | $1.348B | $1.084B |
| Net income | $692M | $283M | $1.262B | $759M |
| Diluted EPS | $0.53 | $0.22 | $0.96 | $0.58 |
| Operating cash flow | $768M | $783M | $1.299B | $1.482B |
- Q2 revenue grew 23%; six-month revenue grew 26%. Q2 gross margin was approximately 71% versus 72% a year earlier; operating margin was approximately 20% versus 19%.
- Q2 segment revenue and operating income: Marketplaces $1.814B and $719M; Payments $1.357B and $350M; GSI $221M and $10M. Payments revenue increased 26% and Marketplaces revenue increased 9% year over year. GSI comparisons are affected by its June 2011 acquisition.
- Q2 operating metrics: Marketplaces GMV was $18.192B, up 8%; GMV excluding vehicles was $16.171B, up 10%. Payments net TPV was $34.451B, up 20%, including Merchant Services net TPV growth of 23%.
- Six-month free cash flow, defined by eBay as operating cash flow less property and equipment purchases, was approximately $700M, down from $1.094B. Cash and cash equivalents were $4.038B at June 30, down from $4.691B at year-end 2011.
- Total debt was $2.082B: $564M short-term and $1.518B long-term. Commercial paper outstanding was $550M at a weighted average rate of 0.19%. No borrowings were outstanding under the $3B credit agreement; $1B was available for other permitted uses after reserving capacity to backstop commercial paper.
- Cash, time deposits and fixed-income investments totaled approximately $8B; approximately $7B was held outside the U.S. eBay reported total current assets of $13.278B and current liabilities of $6.800B.
Material changes and unusual items
- Q2 and first-half 2012 net income included a $118M gain from the May sale of Rent.com. The comparable 2011 periods included a $256M loss on the divestiture of certain GSI businesses.
- Revenue growth reflected higher PayPal and Marketplaces activity and GSI revenue. Foreign currency movements reduced Q2 revenue by approximately $99M and first-half revenue by approximately $122M, net of stated hedging impacts.
- Operating expenses rose, notably sales and marketing and product development, as eBay increased investment in technology, marketing and the shopping experience. Amortization of acquired intangibles also increased, primarily due to acquisitions including GSI.
- Six-month operating cash flow declined year over year, primarily because income tax payments were $639M versus $136M, largely associated with the 2011 sale of eBay’s remaining Skype interest. Investing cash outflow improved substantially from 2011, when acquisitions used $2.847B.
- eBay repurchased $595M of stock in the first half and authorized an additional $2B repurchase program in June. Approximately $2.286B remained authorized at quarter-end.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management said existing cash and investments, operating cash generation, borrowing capacity and capital-market access should fund operations, planned capital expenditures, Bill Me Later receivables and repurchases for the foreseeable future.
- Management identified growth in PayPal payments volume, Marketplaces GMV, user activity and mobile commerce as important operating priorities. It also noted continued investment in technology, platform upgrades and customer experience.
- PayPal’s California regulator said its treatment of approximately $3B of U.S. customer funds held as agent or custodian did not comply with California liquidity rules and required compliance by year-end 2012. The requested waiver was not available under the regulator’s interpretation. A change could bring corresponding customer funds and liabilities onto the balance sheet and could affect revenue or deposit-insurance treatment.
- Bill Me Later receivables were $1.621B; approximately 90% of the portfolio was current. The weighted average FICO score was 690, and 56.4% of balances were owed by consumers with scores above 680. eBay bears credit-loss risk on purchased receivables; unused customer credit availability was approximately $11B.
- Key risks include payment-services regulation and licensing, consumer credit and transaction losses, foreign-exchange exposure, competitive pressure, cybersecurity and service interruptions, and legal claims involving intellectual property, counterfeit goods and online marketplace liability. The filing states that probable legal accruals were not material for the first half, but potential non-monetary remedies could not be estimated.
- The filing also highlights execution risks in migrating GSI clients to its new platform and integration of acquisitions. The company reported no material off-balance-sheet arrangements, apart from disclosed customer funds and cash-pooling arrangements.
Most important facts for investors to verify
- How much reported earnings growth reflects recurring operating performance versus the Rent.com gain and the prior-year GSI divestiture loss.
- Whether PayPal resolves the California liquidity-rule issue by the stated deadline, and the resulting balance-sheet, revenue and customer-fund implications.
- Whether PayPal and Bill Me Later growth can continue without deterioration in credit losses, transaction losses, funding costs or regulatory compliance.
- Whether GSI’s platform migration proceeds on schedule and without client losses, penalties or additional costs.
- How foreign-exchange movements, international regulation and litigation affect growth, margins and cash generation.
- Whether investment spending and share repurchases remain consistent with operating cash flow and the company’s stated liquidity needs.