eBay Guidance Disappoints
eBay Inc. (EBAY) reported third-quarter earnings of 54 cents, just a penny higher than the Zacks Consensus Estimate. Guidance was rather disappointing, sending shares down 5.3%.
Revenue
Gross revenue of $3.89 billion was up 0.4% sequentially and 14.3% year over year, more or less in line with our expectations of around $3.90 billion and in the middle of eBay’s guidance range of $3.85-3.95 billion.
Over 86% of total revenue was transactions-based, while the remaining 14% came from marketing services. Transactions-based revenue grew 1.2% sequentially, while marketing services revenue declined 4.6%. Growing 14.4% and 13.5%, respectively from the year-ago quarter, both contributed to the upside versus guidance.
Revenue Details
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.
Volumes
eBay’s core gross merchandise volume (:GMV) during the quarter excluding vehicles volume was flattish sequentially while growing 12.8% year over year. Non-vehicle GMV grew 12% on a currency-neutral basis (U.S. alone was up 12.8% year over year so there was some drag in international although EU and Korea stabilized).
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 2% and 11% respectively from the previous and year-ago quarters. Sales through the fixed price format comprised 71% of GMV in the last quarter.
eBay’s Paypal remains strong, generating total payment volume (:TPV) growth of 2.4% and 24.7% (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, an increasing share of checkout and a 160 bp increase in Paypal penetration on eBay (now 78%).
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.
Segment Revenue
Marketplaces revenue for the quarter was up 1.3% sequentially and 12.2% from the year-ago quarter. The sequential revenue increase was the net impact of a 1.9% increase in transaction revenue and a 1.4% decline in marketing services revenue. The year-over-year increase was due to an 11.9% increase in transaction revenue and a 13.6% increase in marketing services revenue. Active users in Marketplaces were 137.4 million, up 5 million during the quarter. Marketplaces generated 52% of total revenue.
eBay’s top-rated sellers accounted for 46% of GMV in the U.S., with same store sales growing 17% year over year.
Payments revenue was flat sequentially and up 18.6% from the year-ago quarter. Revenue from transactions was up 1.2% sequentially and 18.1% year over year. The revenue per user dropped sequentially but stayed above year-ago levels. The revenue per transaction followed the same pattern. Revenue from marketing services was down 14.8% sequentially and up 24.5% from the year-ago quarter. The Payments segment generated 42% of total revenue.
Enterprise This is the re-branded GSI (a commerce partner for retailers and brands), bringing in the remaining 6% of revenue. Segment revenue was down 3.3% sequentially and up 4.8% from the year-ago quarter.
eBay’s mobile business was very strong in the last quarter with the company stating that 36% of all new customers were acquired on the mobile platform. It now expects eBay and Paypal mobile volumes of $20 billion each. Mobile brought 2.4 million new users. Better technology and improved user experience should increase engagement on eBay properties.
Revenue by Geography
Around 48% of total revenue was generated in the U.S., representing sequential and year-over-year increases of 0.2% and 14.4%, respectively. The balance came from international markets, which were up 0.6% sequentially and 14.3% from last year.
Margins
The pro forma gross margin for the quarter was 68.6%, down 21 bps sequentially and 201 bps year over year. Volumes were a positive in both comparisons. The Payments transaction margin was flat sequentially, but down from last year due to the combined effect of a lower take rate, higher transaction expenses and a flattish loss rate.
Operating expenses of $1.79 billion were down 2.5% sequentially. The operating margin was 22.6%, up 115 bps sequentially and down 1 bp from the year-ago quarter. All expenses increased as a percentage of sales from the previous quarter, though G&A declined from the year-ago quarter.
Excluding the impact of amortization of intangible assets, a gain on the sale of RueLaLa and ShopRunner, as well as related tax adjustments, the pro forma net income was $710 million or 18.2% of sales, compared to $679 million or 17.5% in the previous quarter and $620 million or 18.2% in the year-ago quarter.
Including the special items, the GAAP net income was $689 million ($0.53 per share) compared to $640 million ($0.49 per share) in the Jun 2013 quarter and $597 million ($0.45 per share) in the Sep quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $10.27 billion, down $165 million during the quarter. eBay generated $1.13 billion in cash from operations and spent $317 million on capex, netting a free cash flow of $1.02 billion (up from $658 million in the last quarter). eBay also spent $70 million on acquisitions and $146 million on share repurchases.
Outlook
Management expects fourth quarter 2013 revenue of $4.50-4.60 billion (up 16.9% sequentially and 14.0% year over year at the mid-point), which was short of consensus expectations of $4.64 billion. The company expects to generate a GAAP EPS of 67 to 69 cents and a non GAAP EPS of 79 to 81 cents. The EPS guidance is better than the Zacks Consensus of 74 cents.
This indicates that 2013 revenue will now be at the low end of the previously-guided range of $16.00-$16.50 billion. The GAAP EPS will therefore also come in at the low end of the previously guided range of $2.21 to $2.26. The non GAAP EPS, even including the penny of dilution related to the Braintree acquisition therefore works out to much lower than the previously-guided $2.70 to $2.75.
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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