eBay Inc. EBAY shares gained 8.4% in after-hours trading. While FX remains a headwind, eBay managed to deliver earnings that were ahead of the Zacks Consensus Estimate. What’s even more encouraging is the raised guidance.
Management sounded upbeat on the call and mentioned several initiatives including the collection of data from sellers, application of artificial intelligence for a better user experience, increased use of social media to drive traffic, focus on a discovery-based user experience and so forth.
While the separation from Paypal PYPL has resulted in the loss of a good growth engine, eBay looks set to sail without it.
eBay seeks to attract more customers to its online properties, engage them and thus generate revenues from them. Therefore, the best way to understand the business is through its revenue/volume growth, customer growth, revenue per customer and cash flows.
Revenue
eBay separated from PayPal on Jul 17 and this was the first quarter the company reported standalone revenue. And it didn’t disappoint.
Gross revenue of $2.10 billion was down 2.4% year over year (up 5% on an FX-neutral basis), in line with the Zacks Consensus Estimate of around $2.10 billion and at the high end of management guidance.
The Gross Merchandise Volume GMV grew 6% year over year on an FX-neutral basis. U.S. GMV grew 3% while international GMV grew 7% on an FX neutral basis. Active buyers/customers of 159 million were up by a couple of million sequentially and up 5% from the year-ago quarter.
Margins
The pro forma gross margin for the quarter was 79.6%, down 165 bps year over year with gross profit dollars down 4.4%.
Operating expenses of $1.09 billion were down 3.3% from last year. The operating margin shrank 116 bps from the year-ago quarter to 27.4%. Only S&M expenses declined as a percentage of sales. Product development costs were flat while COGS increased.
Excluding the impact of intangibles amortization and other items on a tax-adjusted basis, the pro forma net income was $463.0 million or 22.1% of sales compared to $521.0 million or 24.2% in the year-ago quarter.
Including the special items, the GAAP net income was $539 million ($0.44 per share) compared to $673 million ($0.54 per share) in the Sep quarter of last year.
Balance Sheet and Cash Flow
eBay’s balance sheet is highly leveraged, with total debt of $6.81 billion eclipsing the cash and short term investments balance of $5.30 billion. eBay generated $686 million in cash from continuing operations and spent $242 million on capex, netting a free cash flow of $444 million. Share repurchases were $512 million.
Outlook
Since the PayPal spinoff will take place later this month, management provided guidance for the two entities separately.
In 2015, eBay expects revenue to grow 3-5% on an FX neutral basis to $2.275 to $2.325 billion. Non-GAAP earnings are expected to be $0.47-$0.49, significantly better than the Zacks Consensus Estimate of 41 cents.
For the full year, the company maintained its guidance of a 3-5% FX-neutral increase with the non-GAAP EPS expectation rising to $1.80 to $1.82 a share (the Zacks Consensus is at $1.50).
Zacks Recommendation
eBay shares carry a Zacks Rank #3 (Hold). Other companies that may be considered instead are Pandora P, MeetMe MEET and Majesco Entertainment COOL, all of which have a Zacks Rank #1 (Strong Buy).
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