Business context and reporting period
eBay Inc.’s Form 10-K covers the fiscal year ended December 31, 2009; it is an annual report, not a standalone fourth-quarter filing. The company operated Marketplaces, Payments and Communications for most of the year. It sold control of Skype on November 19, 2009, and thereafter continued with Marketplaces and Payments as its primary segments.
eBay operates online marketplaces and payment services, including eBay, PayPal and Bill Me Later. At year-end, it reported approximately 90.1 million active Marketplace users and 81 million active registered PayPal accounts.
Financial and operating highlights
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Revenue | $8.727 billion | $8.541 billion | +2% |
| Gross profit | $6.248 billion | $6.313 billion | -1% |
| Operating income | $1.457 billion | $2.076 billion | -30% |
| Net income | $2.389 billion | $1.779 billion | +34% |
| Diluted EPS | $1.83 | $1.36 | +35% |
| Operating cash flow | $2.908 billion | $2.882 billion | +1% |
Gross margin was approximately 71.6%, versus 73.9% in 2008; operating margin was approximately 16.7%, versus 24.3%. Net income and EPS benefited materially from the Skype sale gain, so they do not reflect a comparable improvement in operating performance.
- Revenue by segment: Marketplaces $5.311 billion, down 5%; Payments $2.796 billion, up 16%; Communications $620 million, up 13%, reflecting Skype through November 19 only.
- Marketplace activity: total GMV was $57.206 billion, down 4%; GMV excluding vehicles increased 1%. Vehicle GMV fell 24%.
- Payments activity: net total payment volume was $71.616 billion, up 19%. Merchant Services TPV grew 34% and represented 55% of PayPal TPV.
- Fourth quarter: revenue was $2.371 billion versus $2.036 billion in Q4 2008; net income was $1.355 billion versus $367 million; diluted EPS was $1.02 versus $0.29. Q4 results included the Skype sale gain.
- Cash and liquidity: cash and cash equivalents were $4.000 billion at year-end, versus $3.189 billion; working capital was $4.818 billion. Cash plus short- and long-term investments totaled approximately $6.326 billion.
- Debt and funding: no amounts were outstanding under the revolving credit facility at year-end; $1.8 billion remained available, subject to covenants. The facility matures November 2012. Bill Me Later receivables were funded from operating cash flow and the credit agreement.
Material changes versus the prior year
- Payments growth more than offset lower Marketplaces revenue. Marketplace transaction revenue declined amid foreign-exchange effects, seller discounts and pricing changes, and weaker vehicle activity.
- Foreign currency movements reduced 2009 revenue by approximately $354 million and operating income by approximately $179 million compared with 2008.
- Operating income fell despite modest revenue growth. General and administrative expense rose 42%, including a $343.2 million Skype-related legal settlement charge; product development expense increased 11%.
- The $1.4 billion gain on the Skype sale drove much of the increase in net income. eBay received approximately $1.9 billion in cash, a $125 million subordinated note and an approximately 30% equity interest in the buyer. Cash proceeds, net of cash disposed, were $1.780 billion.
- eBay acquired Gmarket for approximately $1.2 billion in cash in June 2009. It made no common-stock repurchases in 2009; $656.5 million remained authorized at year-end.
Outlook, risks and unusual items
Management described itself as “cautiously optimistic” about the 2010 economic environment. Priorities included improving Marketplace trust, value, selection and seller tools; growing PayPal Merchant Services, increasing PayPal penetration on eBay, and expanding products and international reach. The filing provides no quantified 2010 revenue or earnings guidance.
- Management cited persistent competition, slower growth and market-share pressure in established Marketplace markets, and possible seller dissatisfaction with pricing, search and policy changes.
- Key risks include recession-related pressure on consumer activity and advertising, foreign-exchange and interest-rate exposure, fraud and customer-protection costs, system outages and cybersecurity, and regulatory uncertainty affecting payments, credit and online marketplaces.
- Bill Me Later depended on CIT Bank for lending; CIT Group had emerged from bankruptcy in December 2009. Bill Me Later’s fiscal-year credit loss rate was approximately 10.66%. The filing also describes a lawsuit alleging Bill Me Later was the true lender under California law.
- Significant legal exposure included the French luxury-goods ruling: approximately EUR 38.6 million in damages and an injunction, followed by a EUR 1.7 million fine in 2009; eBay had appealed. Other pending matters included L’Oréal proceedings, the Tiffany appeal and an antitrust class action.
- A legal-entity restructuring was expected to require approximately $207.4 million of tax cash payment in Q1 2010. The filing also disclosed $929.1 million of unrecognized tax-benefit liabilities.
- Customer-service consolidations could affect approximately 1,100 employees; expected total costs were $45 million to $55 million, with completion anticipated by mid-2010.
Most important facts for investors to verify
- How much of 2009’s net income and Q4 earnings depended on the Skype sale gain, and what recurring earnings look like excluding that item and the settlement charge.
- Whether Payments growth and TPV gains can continue while take rates, funding mix, transaction losses and Bill Me Later credit performance remain manageable.
- Whether Marketplace GMV, seller activity and monetization recover, particularly in vehicles and mature markets, following pricing and policy changes.
- The final outcomes and potential financial impact of the French injunction and other major litigation, including the Skype-related indemnity obligations.
- Whether the expected Q1 2010 tax payment, offshore cash considerations and available credit capacity affect liquidity or capital allocation.