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Why Did eBay Repatriate $9 Billion Foreign Cash?

Posted on Friday, May 2nd 2014

Earlier this week, online retailer eBay (Nasdaq: EBAY) announced their quarterly results. Their results exceeded market expectations, but the big surprise was the announcement of repatriating $9 billion in cash and paying $3 billion in taxes on these funds. eBay wants to use these funds to drive further growth.

eBay’s Financials
Their first quarter revenues grew 14% over the year to $4.26 billion, ahead of the Street’s expectations of $4.23 billion. EPS of $0.70 was also ahead of the market’s expectations of $0.67 for the quarter.

By segment, Marketplace revenues grew to $2.2 billion driven by a 12% growth in gross merchandise volume and a 14% increase in active buyers. They ended the quarter with 145 million active buyers and over 650 million listings on their Marketplace.

eBay settled the earlier Board battle between investor Mr. Icahn regarding spin off of PayPal by adding an independent director David W. Dorman, an ex-AT&T executive, to the board. PayPal is no longer expected to be spun off and continues to deliver strong growth. Total payment volume for the service grew 27% with Merchant Services volume growing 32% and eBay related volume rising 15%. PayPal was able to generate revenues of $1.8 billion. Their member base grew 16% to 148 million.

Mobile solutions are also seeing strong growth. Total eBay-enabled commerce volume grew 24% to $58 billion, and within that, mobile volume recorded a 70% growth to $11 billion.

During the quarter, eBay bought back 33.1 million shares for $1.8 billion.

eBay expects to end the current quarter with revenues of $4.33 billion-$4.43 billion, and earnings of $0.67-$0.69 per share. The Street was looking for revenues of $4.398 billion and EPS of $0.70. eBay expects to end the year with revenues of $18.00 billion-$18.50 billion and EPS of $0.04-$0.09.

eBay Improving Offerings
Meanwhile, eBay continues to improve their service offerings. Earlier this year, they announced the acquisition of PhiSix for an undisclosed sum. PhiSix is a computer graphics company that creates three dimensional models of objects from photos and pattern files. Their solution creates a virtual fitting room for people to try clothes on in various environments. The acquisition will help eBay make their marketplace offering more attractive as users will be able to see how the clothes look on them before ordering them.

Additionally, eBay is also working on releasing a retail mall for merchants called The Plaza. The service is expected to enable direct-to-consumer sales as it will essentially become another storefront for retailers. eBay already has stores like Toys R Us offering their products through the eBay site. But with a new branding image under The Plaza, eBay will hope to attract other big retailers to sell through their site.

eBay is also enhancing customer experience for PayPal. Earlier this year, they released a native payment app for merchants that simplifies payments through PayPal. Now customers are not taken to a PayPal page, instead, the payment can be made through a window on the retailer’s page so that the consumer does not have to leave the merchant website.

eBay Repatriates Funds
Along with the result announcement, eBay also announced plans to repatriate $9 billion from their foreign earnings. eBay will have to pay $3 billion in taxes on this repatriation. eBay says that they want to have these funds available with them to help fund growth and future acquisition. However, they don’t have anything on the radar right now. Most of their acquisitions so far have been in the US and they want to ensure that their coffers are ready for other future acquisitions. Even so, it is surprising to see eBay willing to pay 33% in taxes on these funds.

Recently, Apple announced their plans to raise $12 billion in bonds to fund their buyback. Most companies follow the policy of keeping their funds outside the US and raise debt in the US. Taxes are high on repatriated funds and it is much cheaper to pay interest on the loan. Organizations have been lobbying to get the Government to ease these taxes so that they can invest in growth within the US. But, the government has not been very willing. For some surprising reason, eBay would much rather pay the charge to use the money up-front than increase their debt position.

It’s an intriguing choice, and I don’t understand it.

eBay’s stock is trading at $51.83 with a market capitalization of $67.1 billion. It touched a 52-week high of $59.70 in February this year. Right now, it’s much lower because the market is confused. They need to explain the decision to the market.

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