eBay Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars. At period-end eBay reported Marketplaces and Payments (PayPal) as continuing segments; Enterprise was presented as discontinued operations. PayPal’s separation was completed July 17, 2015, after quarter-end.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenues | $4.379 billion | $4.103 billion | $8.549 billion | $8.100 billion |
| Gross profit | $3.031 billion | $2.922 billion | $5.964 billion | $5.770 billion |
| Operating income | $741 million | $854 million | $1.541 billion | $1.780 billion |
| Income from continuing operations | $682 million | $720 million | $1.353 billion | Loss of $1.575 billion |
| Net income (loss), including discontinued operations | $83 million | $676 million | $709 million | Loss of $1.650 billion |
| Diluted EPS from continuing operations | $0.56 | $0.57 | $1.10 | Loss of $1.24 |
| Diluted EPS, total | $0.07 | $0.53 | $0.58 | Loss of $1.30 |
- Q2 revenue grew 7% year over year, while operating margin fell to 17% from 21%. Gross margin was approximately 69% versus 71%.
- Marketplaces Q2 revenue was $2.116 billion, down 3%; GMV declined 2% to $20.061 billion. Payments revenue was $2.260 billion, up 16%; Net TPV rose 20% to $65.936 billion. Payments growth was partly offset by a lower take rate.
- Q2 segment operating income was $758 million for Marketplaces and $590 million for Payments; corporate and other recorded a $607 million operating loss. Management attributed the consolidated margin decline to higher G&A and a greater revenue mix from lower-margin Payments.
- For the six months, operating cash flow was $2.307 billion, down from $2.668 billion. Continuing-operations operating cash flow was $2.302 billion versus $2.727 billion. Investing cash outflow was $2.420 billion and financing cash outflow was $978 million. Cash and cash equivalents were $4.971 billion at June 30.
- Total debt was $7.622 billion ($865 million short-term and $6.757 billion long-term), broadly unchanged from year-end 2014. eBay had no commercial paper outstanding, $1 billion of additional borrowing capacity under its credit agreement, and was in compliance with debt covenants.
- Cash, cash equivalents, and short- and long-term non-equity investments totaled $15.1 billion. Of $10.3 billion held by non-U.S. subsidiaries, approximately $8.0 billion was available for U.S. use without additional U.S. income taxes beyond amounts accrued. Customer funds and related obligations are substantial and should not be treated as unrestricted liquidity.
Material changes and unusual items
- Q2 Enterprise discontinued operations reported a $599 million after-tax loss, including a $786 million goodwill impairment. The impairment followed the planned sale process; eBay signed an agreement on July 16 to sell Enterprise for $925 million, subject to customary closing conditions, with closing expected in the second half of 2015.
- PayPal was distributed to eBay shareholders on July 17, 2015. PayPal’s historical results and financial position were to be reported as discontinued operations beginning in Q3. Separation costs were approximately $149 million in Q2 and $236 million for the six months.
- Revenue was negatively affected by currency movements by approximately $224 million in Q2 and $456 million year to date, net of specified hedging impacts. Management noted that hedges reduce but do not eliminate currency exposure.
- G&A rose 52% in Q2 to $683 million, primarily due to PayPal separation costs and craigslist litigation-related expenses. The craigslist lawsuit settled in June 2015. A global workforce reduction was completed in the first half; restructuring costs were $112 million year to date. Management expects annual savings above $300 million, largely offset by reinvestment in the business.
- Interest and other, net increased to $126 million in Q2 from $10 million, primarily due to a gain on sale of investments, partly offset by unfavorable foreign-currency activity. A separate $30 million gain was recorded in marketing services and other revenue from selling a participation interest in consumer receivables.
- The six-month 2014 tax provision included an approximately $3.0 billion accrual related to undistributed foreign earnings, making the reported year-over-year tax and net-income comparison unusually pronounced.
Outlook, risks, and contingencies
- The filing provides no clear consolidated revenue or earnings guidance. Management expects seasonal transaction activity patterns to follow general consumer buying patterns and expects Merchant Services to continue gaining share of Payments volume, which carries lower take rates.
- Management said existing liquidity, operating cash flow, available credit facilities, and capital-market access should fund operations, anticipated capital expenditures, the PayPal Credit portfolio, and repurchases for the foreseeable future. eBay contributed approximately $3.8 billion of cash to PayPal during Q2 as part of separation capitalization.
- Key risks include intense ecommerce competition; international and foreign-exchange exposure; regulatory and privacy requirements; cybersecurity and service interruptions; transaction fraud and consumer-credit losses; and the potential for litigation, tax examinations, or changes in law to affect results.
- The 2014 Marketplaces data breach remains subject to regulatory inquiries; the filing says eBay had not been informed of an intended enforcement action. A related class action was dismissed with leave to amend. Legal and regulatory outcomes are uncertain, and some matters’ possible losses cannot be estimated.
- PayPal Credit had $3.1 billion of outstanding consumer receivables, net of $876 million in participation interests held by banks and other investors. Approximately 90% of the portfolio was current. eBay retained credit-loss exposure on its share of receivables; available unused customer credit was approximately $22.1 billion.
- Credit ratings remained investment grade but had been reduced or placed under review following the planned separation; the filing states that further downgrades could raise borrowing costs. Management reported no material liquidity or operating impact from the downgrade to date.
Important facts for investors to verify
- How PayPal’s separation and Enterprise’s proposed sale affect the continuing company’s revenue base, margins, cash flows, and capital structure.
- Whether Marketplaces GMV stabilizes and Payments growth can offset lower take rates and foreign-exchange headwinds.
- Whether separation costs, workforce savings, and planned reinvestment develop as management described.
- Performance and credit quality of PayPal Credit receivables, including loss provisions, funding needs, and participation arrangements.
- Resolution of tax examinations, cybersecurity-related inquiries, and other litigation or regulatory matters.
- Liquidity available after the PayPal distribution, planned repurchases, and any future capital needs; customer funds are matched by customer obligations.