eBay Inc. (EBAY) reported second quarter earnings of 46 cents, which was in line with the Zacks Consensus Estimate. Solid revenue growth, the impact of acquisitions, a stronger gross margin and a much lower tax rate helped drive results.
The company also provided an encouraging outlook for the third quarter and raised expectations for the year, which has resulted in buoyant share prices.
Revenue
Gross revenue of $2.76 billion was up 8.4% sequentially and 24.6% year over year, exceeding consensus expectations of $2.61 billion and the high end of eBay’s guidance range of $2.55-2.65 billion. eBay’s strategy of moving traffic to bigger sellers appears to be paying off, as the improved customer experience seems to be having a positive impact on demand.
Over 85% of total revenue was transactions-based, while the remaining 15% came from marketing services. Both transactions-based revenue (up 5.8% sequentially) and marketing services revenue (up 26.8% sequentially) contributed to the revenue upside versus guidance. They were also up 20.7% and 53.9%, respectively from a year ago.
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 grew 1.3% sequentially and 17.1% year over year. The strength in the last quarter was attributable to stronger demand and increased penetration in the U.S., as well as in international markets, such as Germany and Australia. Payment volumes strengthened again, growing 4.0% and 34.4%, respectively, from the previous and year-ago quarters.
The mobile business remained extremely strong in the last quarter and management stated that eBay remained on track to double mobile GMV from $2 billion last year to $4 billion this year. The eBay mobile apps have been downloaded more than 45 million times.
Mobile payments through the Paypal Mobile Express Checkout system also grew strongly and eBay stated that an estimated 8 million people were already on its mobile payments platform and that the total mobile payment volume was likely to go from $750 million in 2010 to $3 billion this year (eBay estimated $2 billion at the end of the last quarter).
Marketplaces revenue for the quarter increased 7.1% sequentially and 19.0% from the year-ago quarter. The sequential revenue increase was the net impact of a 5.1% increase in transaction revenue and a 16.9% increase in marketing services revenue. The year-over-year increase was due to a 14.1% increase in transaction revenue and a 45.4% increase in marketing services revenue.
Marketing services benefited from the addition of GSI in the last quarter. Growth accelerated across both categories and from both the previous and year-ago quarters. Vehicles volume strengthened in the last quarter, increasing 9% sequentially (the time time in five quarters) and 2% from the year-ago quarter (the second time in five quarters).
Active users in Marketplaces were 97.2 million, up by more than a million during the quarter. Marketplaces generated 60% of total revenue.
eBay’s top-rated sellers now account for 38% of GMV in its three largest markets, having grown 22% year over year. Therefore, sellers are gaining from coming to eBay and driving more traffic to eBay properties. Technology improvements and deduplication of listings are also helping.
Payments revenue increased 8.1% sequentially and 31.3% from the year-ago quarter. Revenue from transactions was up 5.1% sequentially and 28.6% year over year, with the revenue generated per transaction increasing both sequentially and year over year.
The revenue per user also increased from both the previous and year-ago quarters. Additionally, the number of users increased yet again from both the previous and year-ago quarters.
This seems to indicate enhanced user satisfaction, which is bringing back old users and bringing new ones. Revenue from marketing services was up 65.0% sequentially and 76.9% from the year-ago quarter. The Payments segment generated 39% of total revenue.
GSI– During the quarter, eBay closed the acquisition of GSI, which brought in the remaining 1% of revenue.
Revenue by Geography
Around 45% of total revenue was generated in the U.S., representing a sequential increase of 9.5% and a year-over-year increase of 21.0%. The balance came from international markets, which were up 7.6% sequentially and 27.7% year over year.
Renewed strength in the U.S was supplemented by a steady international business where trends in Europe (particularly, U.K. and Germany) were encouraging, Australia was strong and Asia steady (helped by Korea and increasing levels of cross-border trade).
Margins
The pro forma gross margin for the quarter was 72.4%, up 73 bps sequentially and down 25 bps year over year. While volumes were a positive in the last quarter, the increasing number of active users negatively impacted the year-over-year comparison.
Marketplaces margins are generally much higher than Payments margins. However, 62% 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 at this level 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 $1.36 billion were higher than the previous quarter’s $1.19 billion. The operating margin was 23.3%, down 186 bps sequentially and 174 bps from the year-ago quarter.
Higher G&A expense than in both the previous and year-ago quarters as a percentage of sales was the main reason for the higher opex in the last quarter. However, S&M expense also increased. Product development increased on both dollar and percentage-of-sales bases when compared with the June quarter of 2010, but were flat sequentially as a percentage of sales.
Excluding the impact of restructuring gains, acquisition-related costs, the amortization of intangible assets and losses/gains on divested business on a tax adjusted basis, the pro forma net income was $610.0 million or 22.1% net income margin, compared to $531.1 million or 20.9% in the previous quarter and $458.8 million or 20.7% in the year-ago quarter.
Including the special items, the GAAP net income was $283.4 million ($0.22 per share) compared to $475.9 million ($0.36 per share) in the March 2011 quarter and $412.2 million ($0.31 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 $4.40 billion, down $2.37 billion in the last quarter. eBay generated $782.7 million in cash from operations and spent $239.8 million on capex, netting a free cash flow of $542.9 million (down from $551.0 million in the last quarter). It also spent $2.66 billion on acquisitions and $424.8 million on share repurchases.
Outlook
Management expects second quarter 2011 revenue of $2.85-2.95 billion (up 3-7% sequentially, up 27-31% year over year), GAAP EPS of 37 to 38 cents and non GAAP EPS of 46 to 47 cents.
For 2011, management expects revenue of $11.3-$11.6 billion (previous $10.6-$10.9 billion), GAAP EPS of $2.41 to $2.44 (previous $1.53 to $1.58) and non GAAP EPS of $1.97 to $2.00 (previous $1.93 to $1.97).
Conclusion
eBay reported another good quarter and provided encouraging guidance. The fixed price format, while impacting margins negatively, is making the company more competitive and management’s focus on technological improvements, increased selection and improved buyer experience will further improve customer satisfaction.
Additionally, we consider GSI a big positive, since it brings on board fulfillment services something that eBay had been lacking.
Shares have responded positively to the news, but we are 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.
We also think that eBay’s payments business will sooner or later be impacted by online payment platforms from Mastercard Inc. (MA) and other banks.
We are, however, encouraged by eBay's turnaround story and the fact that it is now growing with the market instead of losing market share. We therefore have a short term rating of Strong Buy (Zacks #1 Rank) on the shares.
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