Turnaround Story Continues at eBay - Analyst BlogThursday, April 19, 2012
eBay Inc. (EBAY) reported first quarter earnings of 48 cents including share based compensation, which exceeded the Zacks Consensus by 5 cents. Earnings excluding SBC came in at 56 cents, better than estimates. The quarter was a good one for eBay, driven by a strengthening marketplaces segment and solid payments business.
Gross revenue of $3.28 billion was down 3.0% sequentially and up 28.7% year over year, exceeding consensus expectations of $3.15 billion and eBay’s guidance range of $3.05-3.15 billion Improved customer experience seems to be having a positive impact on results.
Nearly 86% of total revenue was transactions-based, while the remaining 14% came from marketing services. Seasonality impacted both transactions-based revenue (down 2.5% sequentially) and marketing services revenue (down 6.1% sequentially). Growing 26.7% and 41.8%, respectively, both contributed to the upside versus guidance.
Revenue by Segment
eBay reports revenue under the Marketplaces and Payments segments. The Marketplaces segment essentially refers to the revenue earned from the sale of goods available on eBay properties. The Payments segment refers to revenues generated through Paypal. Consequently, both segments derive revenue from transactions, as well as marketing services.
eBay’s core gross merchandise volume (GMV) during the quarter excluding vehicles volume was down 1.7% sequentially and up 11.8% year over year. The increase from the year-ago quarter was helped by fashion, parts and accessories, and ticket sales, all of which were up double-digits. Additionally, both fixed price (64% of GMV) and auction (36%) grew in the last quarter. Vehicles GMV did not do so good, declining 9% from last year.
eBay’s Paypal remains the star performer, generating total payment volume (TPV) growth of 1.5% and 22.5%, respectively from the previous and year-ago quarters. TPV on eBay properties was up 18%.
Management has a three-pronged growth plan here, targeting the online, mobile and offline segments. Opportunities abound in the first two areas, while they continue to unfold in the offline segment as well. The company’s POS solution took off in the last quarter, with the first adoption at The Home Depot (HD) stores. eBay also introduced a solution for small businesses called Paypal Here.
eBay’s mobile business touched $4 billion in 2011, having grown very strongly from $2 billion in 2010. Management stated that there were 12 million downloads of eBay mobile apps in the last quarter. The Paypal Mobile Express Checkout system and the Zong acquisition are expected to boost mobile payment volumes going forward. eBay currently expects total mobile payment volume to increase to $7 billion in 2012.
Marketplaces revenue for the quarter was down 2.5% sequentially and up 11.2% from the year-ago quarter. The sequential revenue decline was the net impact of a 1.3% decline in transaction revenue and a 7.9% decline in marketing services revenue. The year-over-year increase was due to a 10.9% increase in transaction revenue and a 12.8% increase in marketing services revenue.
Marketing services continued to benefit from the addition of GSI in the June quarter. Active users in Marketplaces were 102.4 million, up 2 million during the quarter. Marketplaces generated 53% of total revenue.
eBay’s top-rated sellers now account for around 50% of GMV in the U.S., with same store sales growing 22% year over year, outperforming the market. Therefore, sellers are gaining from coming to eBay and driving more traffic to eBay properties. Technology improvements and deduplication of listings are helping the process.
Payments revenue increased 5.6% sequentially and 31.9% from the year-ago quarter. Revenue from transactions was up 5.1% sequentially and 29.0% year over year. The revenue per user declined sequentially and increased significantly from the year-ago quarter.
The revenue per transaction was flat sequentially and down significantly from last year. The trend indicates that customers showed a preference for a larger number of lower-value items. Revenue from marketing services was up 12.1% sequentially and up 87.4% from the year-ago quarter. The Payments segment generated 40% of total revenue.
GSI - Last year, eBay closed the acquisition of GSI, which brought in the remaining 7% of revenue, down 34.8% during the quarter. However, sales grew strongly from last year, with same store sales at GSI customers increasing 26%.
Revenue by Geography
Around 48% of total revenue was generated in the U.S., representing a sequential decline of 5.1% and a year-over-year increase of 38.6%. The balance came from international markets, which were down 1.1% sequentially and up 20.7% year over year.
eBay’s Asia/Pacific business, particularly China and Korea strengthened in the last quarter. The U.S. and U.K. also strengthened, while Germany stabilized.
The pro forma gross margin for the quarter was 70.6%, up 66 bps sequentially and down 105 bps year over year. Volumes were a positive in the year-over-year comparison. However, eBay sold more low-value items, which resulted in a slight negative. The take rate was up strongly in the Payments segment however, helped by lower transaction expenses and partially offset by a slightly higher transaction loss rate.
Marketplaces margins are generally much higher than Payments margins. However, 64% of transactions in the last quarter were under the fixed price format. The share of the fixed price format has been more or less stable to slightly growing for the last four quarters, which basically means that the company is now much more exposed to the severe price competition in the online retail market.
Operating expenses of $1.56 billion were higher than the previous quarter’s $1.51 billion. The operating margin was 23.1%, down 229 bps sequentially and 199 bps from the year-ago quarter. The sequential decline was higher expenses as a percentage of sales, which witnessed a seasonal decline. The year-over-year decline was mostly on account of higher cost of sales.
Excluding the impact of amortization of intangible assets, accretion of note receivable and loss on divested business on a tax-adjusted basis, the pro forma net income was $632.0 million or 19.3% of sales, compared to $676.2 million or 20.0% in the previous quarter and $531.1 million or 20.9% in the year-ago quarter.
Including the special items, the GAAP net income was $570 million ($0.44 per share) compared to $1.98 billion ($1.51 per share) in the December 2011 quarter and $475.9 million ($0.36 per share) in the March quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $5.87 billion, down $58.4 million in the last quarter. eBay generated $531 million in cash from operations and spent $242 million on capex, netting a free cash flow of $289 million (up from $691 million in the last quarter). eBay also spent $240 million on share repurchases.
Management expects second quarter 2012 revenue of $3.25-3.35 billion (flat sequentially and up 19.6% year over year at the mid-point), which was below consensus expectations of $3.36 billion. The company expects to generate a GAAP EPS of 49 to 51 cents and a non-GAAP EPS of 53 to 55 cents. The EPS guidance is below the Zacks Consensus of 46 cents.
For 2012, management expects revenue of $13.8-$14.1 billion, GAAP EPS of $1.91 to $1.96 and non GAAP EPS of $2.30 to $2.35.
eBay’s business continues to show all signs of a turnaround. Both Payments and Marketplaces are showing improving trends versus the year-ago quarter, an indication of the changing business profile.
We think eBay has taken all the necessary measures, beginning with the fixed price format, moving on to wooing big sellers and customers, and then improving the technology and navigation of its properties.
To this, the company is adding key capabilities through acquisitions. For instance, GSI brought fulfillment services, while Zong brought capabilities in online payment systems.
At the same time, we remain concerned about increasing competition from major online retailers, such as Amazon.com (AMZN), as well as many other smaller players. Additionally, Google Inc (GOOG) has been making some plays in the online retail space that potentially increase competition for the company. While eBay’s payments business shows great promise and innovation has been very strong here, competition is not far behind.
All things considered, we are impressed with eBay’s strategy and execution and expect investors to be willing to pay a higher multiple for the stock. Our sentiments are reflected in the Zacks Rank of #2, which translates to a Buy rating in the short term (1-3 months).
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