eBay Inc. (EBAY) shares gained 3.5% following its earnings report, as earnings of 81 cents beat the Zacks Consensus Estimate of 77 cents by 5.2%. Guided earnings for the March quarter were also better than expected despite the fact that guided revenue fell short.
eBay is currently focused on job cuts — management plans to take out 2,400 jobs, or 7% of the workforce, across its three operating segments.
It currently has three segments: Marketplaces, which is the business of selling merchandise on eBay properties; Payments, which refers to its Paypal payments processing platform; and Enterprises, which primarily help brick-and-mortar outfits grow their online business.
Moreover, management now believes that there are limited synergies between the business units, which have significant potential to grow if separated. eBay therefore intends to reorganize the business, following which it will focus on Marketplaces, while spinning out the Payments unit and looking for strategic alternatives (sale/spinoff) for the Enterprise unit.
A leaner Enterprise business could increase its attraction as a takeover target, although it’s hard to imagine who the likely suitors could be.
Carl Icahn also got what he wanted: other than the PayPal spinoff, Icahn was also granted a seat on eBay’s board to be occupied by Icahn Capital executive Jonathan Christodoro and the option to choose whether he would remain on eBay’s board or PayPal’s following the separation of the businesses later this year.
Revenue
Gross revenue of $4.92 billion was up 13.0% sequentially and 8.6% year over year, missing the Zacks Consensus Estimate of around $4.97 billion by a sliver and in the middle of eBay’s guidance range of $4.85-4.95 billion.
The bulk of revenue (85%) continues to come from transactions, with the balance coming from marketing services. Both categories dropped to single-digit growth rates from the year-ago quarter for the first time since Dec 2010. Transaction revenue grew double-digits sequentially (above seasonal), with marketing services growing high-single-digits (below seasonal).
Revenue Breakup
The three segments generated 47%, 44% and 9% of quarterly revenue, respectively. Enterprise sales grew the strongest sequentially (71.0%) followed by Payments (10.9%) and then Marketplaces (8.2%). Growth from last year was the strongest in the Payments segment (17.8%), followed by Enterprise (8.8%) and then Marketplaces (1.4%).
The domestic business was notably stronger than the international business in the last quarter, growing 17.1% sequentially and 10.1% year over year. International grew 9.5% and 7.3%, respectively from the previous and year-ago quarters, respectively.
Volumes
eBay’s Marketplaces gross merchandise volume (GMV) was up 8.8% sequentially while growing 1.6% year over year with the U.S./International mix is roughly the same at 39%/61%. Active buyers were higher than in both the previous and year-ago quarters.
eBay’s Paypal remained a major driver of revenue, generating total payment volume (TPV) growth of 13.6% and 23.7% from the previous and year-ago quarters, respectively. TPV strength in the last quarter was on account of the increased PayPal adoption by merchant sites, where volumes jumped 33%. eBay volumes grew much slower at 3%.
eBay’s enabled commerce volume (ECV) grew 14.2% sequentially and was 20.8% above the year-ago level.
PayPal’s mobile payments volume jumped 58%, accounting for 20% of total payments volume for the second straight quarter.
Mobile enabled commerce volume jumped 30% from last year to $27.9 billion, or 34% of total volume.
Margins
The pro forma gross margin for the quarter was 67.9%, down 24 bps sequentially and 62 bps year over year. The take rate was down from both the previous and year-ago quarters. This is the main reason for the gross margin decline despite the strong volumes.
Transaction margins expanded sequentially but were down from the year-ago quarter. Lower loss and expense rates helped the sequential comparison. A higher expense rate and flattish loss rate combined hit the comparison with the year-ago quarter. Gross profit dollars increased 12.7% sequentially and 7.6% from the year-ago quarter.
Operating expenses of $2.17 billion were up 2.0% sequentially and 9.5% from last year. The operating margin expanded 454 bps and shrank 97 bps, respectively from the previous and year-ago quarters to 23.8%. The sequential expansion was due to lower expenses across the board. The decline in G&A from the year-ago quarter partially offset the increase in other line items (as a percentage of sales).
Excluding the impact of intangibles amortization, separation costs and other items on a tax-adjusted basis, the pro forma net income was $1.01 billion or 20.5% of sales compared to $731.0 million or 16.8% in the previous quarter and $923.0 million or 20.4% in the year-ago quarter.
Including special items, the GAAP net income was $936 million ($0.75 per share) compared to $673 million ($0.54 per share) in the Sep 2014 quarter and $850 million ($0.65 per share) in the December quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $10.10 billion, down $293 million during the quarter. eBay generated $1.64 billion in cash from operations and spent $369 million on capex, netting a free cash flow of $1.11 billion (down from $941 million in the last quarter). eBay also spent $1.18 billion on share repurchases.
Outlook
Management expects first-quarter 2015 revenue of $4.35-4.45 billion (down 10.6% sequentially and 3.2% year over year at the mid-point), which was short of The Zacks Consensus of $4.70 billion. The company expects to generate a GAAP EPS of 37 to 43 cents and a non GAAP EPS of 68 to 71 cents. The EPS guidance is better than the Zacks Consensus of 65 cents, but management excludes stock based compensation from calculations that is not considered by Zacks.
For 2015, management is looking for revenue in the range of $18.6-19.1 billion, with GAAP earnings of $2.17-2.32 a share and non GAAP earnings of $3.05-3.15 a share. Estimated separation and restructuring costs are expected to be between $350 million and $400 million.
Zacks Recommendation
eBay shares carry a Zacks Rank #3 (Hold). Its closest competitor Amazon (AMZN) shares the same rank, but other ecommerce companies such as Alibaba (BABA) and Mercadolibre (MELI) operating in China and Latin America, respectively, are ranked higher because of their better growth prospects.
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