eBay Reports Strong Q1, Shares Up

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eBay Inc. (EBAY) reported strong fourth-quarter results and guidance that sent shares up 5.7% in after-hours trading.

Revenue

Gross revenue of $4.53 billion was up 16.4% sequentially and 13.5% year over year, more or less in line with our expectations of around $4.56 billion and in the middle of eBay’s guidance range of $4.50-4.60 billion.

The bulk of revenue (86%) continues to come from transactions, with the balance coming from marketing services. Both categories grew double-digits from the previous and year-ago quarters.

Revenue Details

eBay’s has three segments: Marketplaces, which refers to the revenue earned from the sale of goods available on eBay properties, Payments, which refers to revenues generated through Paypal and Enterprises, which comprise mainly of services rendered following the acquisition of GSI. Revenue growth was in the high teens in both the Marketplaces and Payments segments, with both transactions and marketing services contributing almost equally.

The Enterprise segment although up over 64% on a sequential basis, remained slightly below year-ago levels. The Marketplaces, Payments and Enterprise segments generated 51%, 40% and 9% of total revenue, respectively.

Around 48% of total revenue was generated in the U.S., representing sequential and year-over-year increases of 16.4% and 11.9%, respectively. The balance came from international markets, which were up 16.4% sequentially and 15.0% from last year.

Volumes

eBay’s core gross merchandise volume (:GMV) during the quarter excluding vehicles volume was up 17.2% sequentially while growing 12.6% year over year. Non-vehicle GMV grew 12% on a currency-neutral basis (U.S. alone was up 14% year over year so the drag in international appears to be continuing).

The overall increase from the year-ago quarter was helped by better customer experience, as site improvements continued and mobile engagement grew. Vehicles GMV was down 11% and 9% respectively from the previous and year-ago quarters. Sales through the fixed price format comprised 73% of GMV in the last quarter.

eBay’s Paypal remains strong, generating total payment volume (:TPV) growth of 18.6% and 25.3% (25% on a currency-adjusted basis) from the previous and year-ago quarters, respectively. TPV strength in the last quarter was on account of increased Paypal adoption by merchant sites all over the world and traction on the mobile platform. Paypal penetration on eBay slid from 78% to 51% with around 30% of active accounts coming from eBay.

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. Its agreements with NCR Corp (NCR) and Discover will help it to further extend its reach.

Margins

The pro forma gross margin for the quarter was 68.5%, down 56 bps sequentially and 134 bps year over year. eBay continues to make investments to improve the quality of its services, which is increasing cost for the company. This is the main reason for the gross margin decline despite such a strong jump in volumes. The Payments transaction margin was flat sequentially, but down from last year due to the combined effect of lower transaction expenses and a higher transaction loss rate.

Operating expenses of $1.98 billion were down 10.7% sequentially. The operating margin was 24.8%, up 169 bps sequentially and down 41 bps from the year-ago quarter. All expenses declined sequentially but while product development and S&M also declined from the year-ago quarter, G&A increased.

Excluding the impact of intangibles amortization, restructuring and acquisition-related charges on a tax-adjusted basis, the pro forma net income was $923 million or 20.4% of sales, compared to $723 million or 18.6% in the previous quarter and $808 million or 20.2% in the year-ago quarter.

Including the special items, the GAAP net income was $850 million ($0.65 per share) compared to $689 million ($0.53 per share) in the Sep 2013 quarter and $751 million ($0.57 per share) in the Dec quarter of last year.

Balance Sheet and Cash Flow

The company has a solid balance sheet, with cash and short term investments of $9.03 billion, down $1.25 billion during the quarter. eBay generated $1.71 billion in cash from operations and spent $281 million on capex, netting a free cash flow of $1.432 billion (up from $412 million in the last quarter). eBay also spent $784 million on acquisitions and $254 million on share repurchases.

Outlook

Management expects first quarter 2014 revenue of $4.150-4.250 billion (down 7.3% sequentially and up 12.1% year over year at the mid-point), which was short of consensus expectations of $4.30 billion. The company expects to generate a GAAP EPS of 51 to 53 cents and a non GAAP EPS of 65 to 67 cents. The EPS guidance is better than the Zacks Consensus of 64 cents.

For 2014, eBay expects revenue of $18-18.5 billion, with GAAP earnings of $2.40-$2.45 and non-GAAP earnings of $2.95-$3.00. The dilutive impact of Braintree is expected to be 3 to 8 cents.

For 2015, eBay expects revenue of $20.5-21.5 billion with non-GAAP EPS growth of more than 10%.

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 that eBay has taken all the necessary measures, beginning with the fixed price format, moving on to wooing big sellers and customers, improving the technology and navigation of its properties, investing in better fulfillment services and specially focusing on mobile customers. Its drive to provide complete online solutions for traditional retailers should further add to its growth going forward.

It goes without saying that major online retailers, such as Amazon.com (AMZN) are not going to make things easy for eBay. Additionally, Google Inc (GOOG) has been making some plays in the online retail/payments segment 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.

eBay shares have a Zacks Rank #4 (Sell).

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