eBay Delivers Another Good Quarter - Analyst Blog

By Zacks | July 19, 2012 AAA

eBay Inc. (EBAY) reported second quarter earnings of 51 cents including share-based compensation (SBC), which exceeded the Zacks Consensus by 3 cents. Earnings excluding SBC came in at 70 cents, much better than the Street. A favorable tax ruling in Korea had a $29 million positive impact on revenue a 2 cent positive impact on earnings.     Continued strength in Payments coupled with a reinvigorated Marketplaces business drove share prices up 3.6% in after-hours trading.

Revenue

Gross revenue of $3.40 billion was up 3.7% sequentially and 23.1% year over year, exceeding consensus expectations of $3.36 billion and eBay's guidance range of $.25-3.35 billion.

Over 85% of total revenue was transactions-based, while the remaining 15% came from marketing services. Seasonality impacted both transactions-based revenue (up 2.3% sequentially) and marketing services revenue (up 11.5% sequentially). Growing 22.6% and 24.7%, respectively from the year-ago quarter, 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 flat sequentially and up 10.2% 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 very strongly.

Additionally, both fixed price (65% of GMV) and auction (34%) grew in the last quarter. Vehicles GMV also improved, growing 10% from last year.

eBay's Paypal remains the star performer, generating total payment volume (TPV) growth of 1.8% and 19.9%, respectively from the previous and year-ago quarters. TPV on eBay properties was up 18%. Management stated that more than half the revenues were generated internationally.

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 gained momentum in the last quarter, with the 15 retailers adopting the technology, following its adoption by The Home Depot (HD) stores in the first quarter. Of these, Office Depot (ODP) was the biggest win, since it not only adopted the POS solution, but also eBay's PayPal Online and PayPal Mobile. Another important win was Starbucks Corp (SBUX), which added PayPal to the Android version of their mobile app.

eBay's mobile business touched $4 billion in 2011, having grown very strongly from $2 billion in 2010. eBay mobile apps have now been downloaded 90 million times and the company currently expects total mobile payment volume to increase 150% to $10 billion in 2012. The Paypal Mobile Express Checkout system and the Zong acquisition are expected to boost mobile payment volumes going forward.  

Marketplaces revenue for the quarter was up 5.0% sequentially and 9.1% from the year-ago quarter. The sequential revenue decline was the net impact of a 4.6% increase in transaction revenue and a 6.6% increase in marketing services revenue.

The year-over-year increase was due to a 10.5% increase in transaction revenue and a 2.9% increase in marketing services revenue. Active users in Marketplaces were 104.8 million, up 2.4 million during the quarter. Marketplaces generated 54% of total revenue.

eBay's top-rated sellers now accounted for more than 50% of GMV in the U.S., with same store sales growing 18% year over year, outperforming the market. Around 48% of sellers are offering free shipping, which is 11 points more than in the year-ago quarter.  Therefore, it is evident that sellers are gaining from coming to eBay and driving more traffic to eBay properties. Technology improvements are helping the process.

Payments revenue increased 3.7% sequentially and 26.5% from the year-ago quarter. Revenue from transactions was up 1.5% sequentially and 32.3% year over year. The revenue per user declined sequentially and increased significantly from the year-ago quarter.

The revenue per transaction was flat sequentially although 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 11.5% sequentially and 24.7% 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 6.8% during the quarter. However, sales grew strongly from last year, with same store sales at GSI customers increasing 21%.

Revenue by Geography

Around 47% of total revenue was generated in the U.S., representing a sequential increase of 1.9% and a year-over-year increase of 29.0%. The balance came from international markets, which were up 5.4% sequentially and 18.3% year over year.

Margins

The pro forma gross margin for the quarter was 71.5%, up 87 bps sequentially and down 92 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 Payments take rate improved again however, with both the transaction expenses and transaction loss rate coming in flat.

Marketplaces margins are generally much higher than Payments margins. However, 65% 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 few quarters.

Operating expenses of $1.63 billion were higher than the previous quarter's $1.56 billion. The operating margin was 23.5%, up 35 bps sequentially and 23 bps from the year-ago quarter. Expenses were relatively flat as a percentage of sale compared with both the previous and year-ago quarters, although product development costs trended up, while G&A trended down.

Excluding the impact of amortization of intangible assets and gain from divested business on a tax-adjusted basis, the pro forma net income was $667 million or 19.6% of sales, compared to $632 million or 19.3% in the previous quarter and $610 million or 22.1% in the year-ago quarter.

Including the special items, the GAAP net income was $692.0 million ($0.53 per share) compared to $570.0 million ($0.44 per share) in the March 2012 quarter and $283.4 million ($0.22 per share) in the June quarter of last year.

Balance Sheet and Cash Flow

The company has a solid balance sheet, with cash and short-term investments of $5.75 billion, down $117.0 million in the last quarter. eBay generated $768 million in cash from operations and spent $357 million on capex, netting a free cash flow of $411 million (up from $289 million in the last quarter). eBay also spent $355 million on share repurchases.

Outlook

Management expects third quarter 2012 revenue of $3.3-3.4 billion (down 1.4% sequentially and up 13.0% year over year at the mid-point), which was below consensus expectations of $3.42 billion. The company expects to generate a GAAP EPS of 42 to 44 cents and a non GAAP EPS of 53 to 55 cents. The EPS guidance is above the Zacks Consensus of 47 cents and just short of the street expectations of 55 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.

Conclusion

eBay's business continues to show all signs of improvement. 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 our sentiments are reflected in the Zacks Rank of #3, which translates to a Hold rating in the short term (1-3 months).

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