Business context and reporting period
eBay Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2020. Its continuing reportable segment is Marketplace. eBay attributes improved Marketplace traffic and buyer acquisition partly to pandemic-related shifts toward online shopping. StubHub was sold in February 2020; the proposed sale of Classifieds to Adevinta was pending at quarter-end, so both businesses are presented as discontinued operations.
Financial performance and liquidity
Amounts are in U.S. dollars; comparisons are with the same 2019 period unless noted.
- Revenue: Third-quarter net revenue was $2.606 billion, up 25%. Net transaction revenue rose 29% to $2.355 billion, while marketing services and other revenue fell 1% to $251 million. GMV increased 22% to $25.049 billion; take rate rose to 9.40% from 8.93%. Nine-month revenue was $7.403 billion, up 16%.
- Profit and margins: Q3 gross profit was $1.950 billion, up 26%; gross margin was 74.8% versus 74.6%. Operating income was $679 million versus $408 million, and operating margin was 26.1% versus 19.6%. Continuing-operations income was $621 million; diluted continuing-operations EPS was $0.88 versus $0.25. Net income was $664 million versus $310 million, including $43 million of discontinued-operations income. Nine-month net income of $4.822 billion included $3.061 billion from discontinued operations; continuing-operations income was $1.761 billion.
- Unusual earnings item: Q3 interest and other, net was income of $95 million, including a $191 million gain from the Adyen warrant’s fair-value change. For nine months, the warrant generated a $496 million gain. Nine-month discontinued-operations income included a $3.9 billion pretax gain on the StubHub sale.
- Cash flow: Nine-month cash from continuing operating activities was $2.263 billion, versus $1.889 billion. Total operating cash flow, including discontinued operations, was $1.661 billion versus $2.303 billion. Continuing investing activities used $444 million; continuing financing activities used $5.141 billion. Continuing cash, cash equivalents and restricted cash at period-end were $1.089 billion.
- Liquidity and debt: Cash, cash equivalents and continuing non-equity investments totaled approximately $4.1 billion. Total debt was $7.755 billion, compared with $7.758 billion at December 31, 2019; $7.738 billion was long-term. No commercial paper or revolving-credit borrowings were outstanding, and $2 billion of credit-facility capacity was available. eBay reported compliance with debt covenants. Current assets were $6.739 billion and current liabilities were $3.840 billion.
- Capital returns: eBay repurchased $4.7 billion of shares and paid $337 million in dividends during the first nine months. The board declared a further $0.16-per-share dividend for payment in December 2020.
Material changes versus the prior comparable period
- Q3 revenue growth reflected higher transaction volume and take rate, with management citing improved traffic and buyer acquisition during the pandemic and growth in managed payments and promoted listings.
- Operating margin increased by 6.5 percentage points. Cost of revenue rose 24%, largely due to payment processing and Korean first-party inventory costs, but fell as a share of revenue to 25.1% from 25.4%.
- Marketing services and other revenue declined, which eBay attributed partly to the prior sale of brands4friends and a shift from advertising toward promoted listings recorded as transaction revenue.
- Continuing operating cash flow improved, but total operating cash flow decreased, partly reflecting discontinued-operations cash flows. Nine-month EPS and net income were substantially affected by the StubHub sale gain.
- Weighted-average diluted shares fell to 708 million from 837 million in Q3, alongside substantial share repurchases.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management said pandemic-driven online shopping trends may continue but could evolve, causing volatility and a wider range of outcomes. eBay said existing liquidity, operating cash generation, borrowing capacity and capital-market access should fund foreseeable needs, while cautioning that COVID-19 could affect operations, markets, borrowing costs and liquidity. The company expected the Adevinta transaction to close by Q1 2021, subject to regulatory, shareholder and other closing conditions; consideration included $2.5 billion in cash and 540 million Adevinta shares, whose value could fluctuate. Other disclosed risks include intense competition, foreign-exchange exposure, payments execution and regulation, cybersecurity, litigation and tax examinations. The filing reported no material off-balance-sheet arrangements and no material accrued legal losses.
Important facts for investors to verify
- Whether Marketplace growth and the higher take rate persist as pandemic conditions and consumer behavior change.
- The contribution of the Adyen warrant’s noncash fair-value gain and the StubHub disposal gain to reported earnings.
- Completion, timing and final value of the Classifieds transfer, including regulatory and shareholder approvals and Adevinta share-price exposure.
- Cash generation after separating continuing operations from discontinued operations, and the effects of debt service and share repurchases on liquidity.
- Developments in payments-related costs and losses, foreign-exchange movements, tax audits, litigation and other regulatory risks.