eBay Guidance Driving Shares
eBay Inc. (EBAY) reported second quarter earnings of 49 cents, which exceeded the Zacks Consensus by 3 cents. Earnings excluding SBC came in at 55 cents, just exceeding the street’s 54 cents. Higher revenues from low-tax regions led to a significantly lower tax rate helped results.
The reinvigorated Marketplaces business and progress with the Payments business is leading to growing optimism about eBay shares.
Revenue
Gross revenue of $3.40 billion was flat sequentially and up 14.8% year over year, exceeding consensus expectations of $3.41 billion and eBay’s guidance range of $.3.3-3.4 billion.
Around 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 5.6%. Growing 15.3% and 11.0%, respectively from the year-ago quarter, both contributed to the upside versus guidance.
Revenue by Segment
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 11.0% (15% on a currency-adjusted basis) year over year. The increase from the year-ago quarter was helped by improved customer experience, success on the mobile platform and particularly strong demand in clothing, accessories and ticket sales. Vehicles GMV weakened, declining 1% and 7%, respectively from the previous and year-ago quarters. Sales through the fixed price format comprised 66% of total sales in the last quarter.
eBay’s Paypal remains the star performer, generating total payment volume (:TPV) growth of 2.1% and 20.1%, respectively from the previous and year-ago quarters. TPV on eBay properties was up 18% (on a currency-adjusted basis). 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. eBay added 20 major retailers in the last quarter.
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 more than 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 down 0.4% sequentially and up 9.3% from the year-ago quarter. The sequential revenue decline was the net impact of a 0.1% decline in transaction revenue and a 2.2% decline in marketing services revenue. The year-over-year increase was due to a 10.1% increase in transaction revenue and a 5.6% increase in marketing services revenue. Active users in Marketplaces were 108.3 million, up 3.5 million during the quarter. Marketplaces generated 53% of total revenue.
eBay’s top-rated sellers now accounted for more than 36% of GMV in the U.S., with same store sales growing 24% year over year. Management also stated that sellers were providing free or speedy shipping depending on customer choice, which was improving customer satisfaction. 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 0.7% sequentially and 23.4% from the year-ago quarter. Revenue from transactions was up 2.4% sequentially and up 22.4% year over year. The revenue per user declined sequentially although increasing from the year-ago quarter. The revenue per transaction declined from both the previous and year-ago quarters. The trend indicates that customers showed a preference for a larger number of lower-value items (similar to the last few quarters). Revenue from marketing services was down 17.1% sequentially and up 22.4% 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, up 2.7% during the quarter and 12.0% year over year. Same store sales at GSI customers increased 19% from last year.
Revenue by Geography
Around 48% of total revenue was generated in the U.S., representing a sequential increase of 1.6% and a year-over-year increase of 14.7%. The balance came from international markets, and was down 1.1% sequentially while increasing 14.9% year over year.
Margins
The pro forma gross margin for the quarter was 70.6%, down 95 bps sequentially and up 89 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 declined however, with a higher transaction loss rate and flat transaction expenses resulting in a 1.5 percentage point decline in the transaction margin.
Marketplaces margins are generally much higher than Payments margins. However, 66% 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 flat sequentially. The operating margin was 22.6%, down 86 bps sequentially and 18 bps from the year-ago quarter. Expenses were relatively flat as a percentage of sales compared to both the previous and year-ago quarters, with the sequential increase in cost of sales the only exception.
Excluding the impact of amortization of intangible assets on a tax-adjusted basis, the pro forma net income was $711 million or 20.9% of sales, compared to $667 million or 19.6% in the previous quarter and $527 million or 17.8% in the year-ago quarter.
Including the special items, the GAAP net income was $597 million ($0.45 per share) compared to $692 million ($0.53 per share) in the June 2012 quarter and $491 million ($0.37 per share) in the September quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $9.14 billion, up $3.38 billion during the quarter. eBay generated $1.15 billion in cash from operations and spent $362 million on capex, netting a free cash flow of $792 million (up from $411 million in the last quarter). eBay also spent $47 million on share repurchases.
Outlook
Management expects fourth quarter 2012 revenue of $3.85-4.00 billion (up 15.3% sequentially and 16.1% year over year at the mid-point), which was just short of consensus expectations of $3.94 billion. The company expects to generate a GAAP EPS of 55 to 58 cents and a non GAAP EPS of 66 to 69 cents. The EPS guidance is above the Zacks Consensus of 60 cents and in line with the street expectations of 68 cents.
For 2012, management expects revenue of 13.95-$14.10 billion (previous $13.8-$14.1 billion), GAAP EPS of $1.95 to $1.99 (previous $1.91 to $1.96) and non GAAP EPS of $2.32 to $2.35 (previous $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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