eBay Inc. (EBAY) reported first-quarter earnings of 55 cents, which exceeded the Zacks Consensus by a penny, or 1.9%. Sequential comparisons were hard due to holiday-driven strength in the December quarter. They were also impacted by weakness in certain international markets. However, all metrics were positive when compared to the year-ago quarter and it is apparent that management initiatives to drive growth are bearing fruit.
Share prices dropped 2.6% after-hours as guidance disappointed. Management stated that Europe and currency were likely to be weaker through 2013.
Revenue
Gross revenue of $3.75 billion was down 6.1% sequentially and up 14.4% year over year, just short of consensus expectations of $3.77 billion and at the high end of eBay’s guidance range of $3.65-3.75 billion.
Around 86% of total revenue was transactions-based, while the remaining 14% came from marketing services. Transactions-based revenue dropped 6.1% sequentially, while marketing services revenue dropped 7.2%. The decline is attributable to seasonality, as eBay had very strong transaction growth in the December holiday season. Growing 14.4% and 13.5%, 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 declined 4.1% sequentially while growing 13.1% year over year. Non-vehicle GMV grew 13% on a currency-neutral basis (U.S. 16%, international 11%). The overall increase from the year-ago quarter was helped by better customer experience, as site improvements continued and mobile engagement grew. The clothing, accessories, home and garden categories remained the strongest drivers. Vehicles GMV continued to weaken, declining 2% and 10%, respectively from the previous and year-ago quarters. Sales through the fixed price format comprised 68% of GMV in the last quarter.
eBay’s Paypal remains strong, generating total payment volume (TPV) growth of 21.2% from the year-ago quarter. TPV was down slightly on a sequential basis due to seasonality. TPV on eBay properties was up 22% (on a currency-adjusted basis), driven by increased Paypal adoption by merchant sites all over the world and increased penetration on 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.
eBay’s mobile business touched $13 billion in 2012 (from $4 billion in 2011, $3 billion more than estimated). The company had 3 million new users in the last quarter. Better technology and improved user experience should increase engagement on eBay properties.
Marketplaces revenue for the quarter was down 4.5% sequentially and up 13.3% from the year-ago quarter. The sequential revenue decline was the net impact of a 3.8% decline in transaction revenue and a 7.7% decline in marketing services revenue. The year-over-year increase was due to a 12.8% increase in transaction revenue and a 15.2% increase in marketing services revenue. Active users in Marketplaces were 116.2 million, up 3.9 million during the quarter. Marketplaces generated 52% of total revenue.
eBay’s top-rated sellers accounted for more than 42% of GMV in the U.S., with same store sales growing 17% year over year.
Payments revenue increased 0.5% sequentially and 18.3% from the year-ago quarter. Revenue from transactions was down 3.8% sequentially while increasing 18.0% year over year. The revenue per user increased dropped sequentially and increased year over year. The revenue per transaction was slightly higher on a sequential basis but remained below the year-ago level. The trend indicates that customers continue to show a preference for a larger number of lower-value items (the slight increase in revenue per transaction in the fourth quarter appears to be Holiday-related). Revenue from marketing services was up 3.7% sequentially and 21.5% from the year-ago quarter. The Payments segment generated a little over 41% of total revenue.
GSI- GSI, which brought in the remaining 6% of revenue, was down 40.7% sequentially and consistent with the year-ago quarter. Same store sales at GSI customers increased 16% from last year.
Revenue by Geography
Around 48% of total revenue was generated in the U.S., representing a sequential decline of 8.2% and a year-over-year increase of 13.2%. The balance came from international markets, which were down 4.1% sequentially and up 15.5% from last year.
Margins
The pro forma gross margin for the quarter was 69.7%, down 7 bps sequentially and 90 bps year over year. Volumes were a negative in both comparisons. Additionally, eBay is now selling more lower-ASP inventory, which is pulling down its margins. The Payments take rate increased sequentially but was offset by higher transaction expenses and a higher loss rate. All numbers weakened with respect to the year-ago quarter. As a result the transaction margin declined both sequentially and year over year.
Operating expenses of $1.72 billion were down 3.5% sequentially. The operating margin was 23.9%, down 129 bps sequentially and up 78 bps from the year-ago quarter. All except selling costs increased as a percentage of sales from both th previous and year-ago quarters.
Excluding the impact of amortization of intangible assets, a restructuring gain and tax adjustments, the pro forma net income was $722 million or 19.3% of sales, compared to $808 million or 20.2% in the previous quarter and $627 million or 19.1% in the year-ago quarter.
Including the special items, the GAAP net income was $677 million ($0.51 per share) compared to $751 million ($0.57 per share) in the Dec 2012 quarter and $570 million ($0.44 per share) in the Mar quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $9.40 billion, down $6 million during the quarter. eBay generated $937 million in cash from operations and spent $299 million on capex, netting a free cash flow of $638 million (down from $1.09 billion in the last quarter). eBay also spent $476 million on share repurchases.
Outlook
Management expects second quarter 2013 revenue of $3.80-3.90 billion (up 2.7% sequentially and 13.3% year over year at the mid-point), which was short of consensus expectations of $3.95 billion. The company expects to generate a GAAP EPS of 46 to 48 cents and a non GAAP EPS of 61 to 63 cents. The EPS guidance is below the Zacks Consensus of 57 cents.
For 2013, management expects revenue of 16.00-$16.50 billion (maintained). The GAAP EPS for the year is expected to be $2.23 to $2.29 (maintained), while the non GAAP EPS is expected to be $2.70 to $2.75 (maintained).
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 and investing in better fulfillment services.
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.
All things considered, we are impressed with eBay’s strategy and execution, although we recognize certain headwinds related to Europe/Asia. Our sentiments are reflected in the Zacks Rank #3 (Hold).
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