eBay Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. eBay operates Marketplaces and Payments, including PayPal and Bill Me Later. Skype was sold in November 2009; its operating results are excluded from 2010 but included in the 2009 comparison through the sale date, limiting comparability.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net revenue | $2.196 billion | $2.021 billion | +9% |
| Gross profit | $1.590 billion | $1.447 billion | +10% |
| Operating income | $488.6 million | $422.8 million | +16% |
| Net income | $397.7 million | $357.1 million | +11% |
| Diluted EPS | $0.30 | $0.28 | +$0.02 |
| Operating cash flow | $418.3 million | $668.5 million | −37% |
- Gross margin was approximately 72.4%, versus 71.6% a year earlier. Operating margin rose to 22% from 21%.
- Marketplaces revenue increased 13% to $1.387 billion; Payments revenue increased 26% to $809.3 million. Communications revenue was zero in Q1 2010 following the Skype sale.
- Marketplaces gross merchandise volume excluding vehicles rose 24% to $13.371 billion; total GMV increased 20% to $15.392 billion. Payments net total payment volume grew 35% to $21.348 billion.
- At March 31, cash and cash equivalents were $3.593 billion, short-term investments $934.9 million and long-term investments $1.978 billion. The company reported $5.4 billion of cash, cash equivalents and non-equity investments, including approximately $4.3 billion held outside the U.S.
- Current assets were $8.277 billion and current liabilities $3.587 billion. Total liabilities were $4.565 billion; stockholders’ equity was $14.125 billion. No amounts were outstanding under the $1.8 billion revolving credit facility.
- Investing activities used $701.0 million, mainly from net investment purchases and $152.3 million of property and equipment spending. Cash decreased $406.8 million during the quarter to $3.593 billion at period-end.
Changes, drivers and outlook
- Management attributed revenue growth to Payments and Marketplaces expansion and favorable currency movements, which added approximately $88.2 million to revenue year over year. The comparison also reflects Gmarket, acquired in 2009, and the absence of Skype revenue in 2010.
- Payments growth reflected increased PayPal adoption; Merchant Services TPV grew 49% and represented 59% of PayPal net TPV. Lower take rates, partly from a shift toward larger merchants, tempered revenue growth.
- Operating margin improvement reflected productivity gains and lower acquired-intangible amortization, partly offset by faster growth in lower-margin Payments and lower take rates. Management said Payments segment margin rose about 5 percentage points, while Marketplaces segment margin declined about 3 points due to customer-protection investment and Gmarket.
- Operating cash flow fell primarily because of $207.4 million of taxes paid related to a 2009 legal-entity restructuring and higher employee bonus payments. Cash taxes paid totaled $311.4 million.
- Transaction and loan-loss provision rose 31% to $106.0 million, driven mainly by customer-protection costs and higher GMV and TPV, partly offset by improved PayPal transaction-loss rates. Management expects this provision to fluctuate with economic conditions and protection programs.
- Management expected 2010 revenue to benefit from continuing GMV and net TPV momentum, partly offset by currency movements; it cited modest improvement in some Marketplaces metrics and continued strong Payments growth. A stronger U.S. dollar was expected to pressure results. No specific revenue or EPS guidance range is provided in the filing text.
Unusual items, risks and contingencies
- Skype repaid its $125 million subordinated note and $50 million of senior debt securities. eBay recorded a $22.8 million gain in interest and other income, with a $13.7 million net-income impact; it reinvested about $91.4 million in new five-year Skype debt securities.
- The customer-service consolidation could affect approximately 1,100 employees. Expected total costs were $45 million–$55 million; $35.2 million had been incurred through March 31, with completion expected by mid-2010.
- Unrecognized tax benefits were $842.8 million at quarter-end. eBay was under examination for tax years 2003–2008 and said existing positions would continue to increase these liabilities over the next 12 months.
- French luxury-brand litigation included a 2008 judgment of approximately EUR 38.6 million and an injunction, followed by a EUR 1.7 million fine in 2009; eBay appealed and said it had taken compliance measures. In April 2010, after quarter-end, the Second Circuit upheld the ruling that eBay was not liable to Tiffany for direct or contributory trademark infringement, remanding the false-advertising issue.
- Other disclosed matters include an appeal of a favorable judgment in an antitrust class action, an appeal in the Korean data-breach litigation after a ruling finding no liability, and patent disputes. Outcomes and potential losses are not clearly quantified in the filing text.
- Key risks include competition and slower Marketplaces growth in established markets; seller response to pricing and policy changes; fraud, customer-protection losses and cybersecurity or service interruptions; foreign-exchange exposure; regulation and litigation concerning online marketplace liability; and Bill Me Later’s credit, funding, bank-partner and regulatory risks.
Important facts for investors to verify
- Assess underlying growth and profitability after accounting for the Skype divestiture, Gmarket acquisition, currency effects and one-time Skype-related gain.
- Track whether Payments TPV growth can continue without further take-rate or margin pressure, and whether Marketplaces initiatives improve activity while containing customer-protection costs.
- Monitor operating cash generation, including the effects of taxes, working capital, bonuses and investment spending.
- Review the status and potential financial impact of material litigation, tax examinations and the French injunction, including developments after quarter-end.
- Evaluate currency sensitivity and the availability of overseas cash: repatriation could trigger additional U.S. taxes in certain circumstances.