eBay Inc. (EBAY) reported first-quarter earnings that beat the Zacks Consensus by a penny. Revenues were in line with the Zacks Consensus estimate.
Revenue
Gross revenue of $2.20 billion was down 7.4% sequentially and up 8.7% year over year in the seasonally softer March quarter. Quarterly revenue did not include any contribution from Skype, which was disposed off in Nov 2009. The company is accounting for its stake in Skype under the equity method.
Around 88% of total revenue was transactions-based, while the remaining 12% came from marketing services.
Transaction revenue was the stronger of the two categories, declining 6.8% sequentially, but increasing 8.8% from the year-ago quarter. Marketing services revenue on the other hand was down 11.8% sequentially and up 7.5% year over year.
Revenue by Segment
The company reported revenue under the Marketplaces and Payments segments. The marketplaces segment essentially refers to the revenue earned from the sale of goods available on the eBay properties. The payments segment refers to revenues generated through Paypal. Consequently, both segments derive revenue from transactions, as well as marketing services.
Marketplaces revenue declined 5.2% sequentially, but increased 13.3% compared to the year-ago quarter. The sequential revenue decline was driven by a 3.8% decrease in transaction revenue and a 12.2% decrease in marketing services revenue. The year-over-year increase was due to a 13.5% increase in transaction value and a 12.2% increase in marketing services revenue. Vehicles volume continued to decline both sequentially and year over year. The segment generated 63% of total revenue.
Payments revenue increased 1.7% sequentially and 25.9% from the year-ago quarter. Revenue from transactions was up 1.3% sequentially and 26.7% year over year, as both the number of active users and the number of transactions increased. The revenue generated per transaction declined sequentially, although cost per transaction and transaction loss rates declined slightly. Revenue generated per transaction increased from the year-ago quarter, helped by a slightly lower transaction processing expense rate and a significantly lower transaction loss rate.
Revenue from marketing services was up 10.6% sequentially but up 12% from the year-ago quarter. The segment generated 37% of total revenue.
Revenue by Geography
Around 46% of total revenue was generated in the U.S., representing a sequential decline of 3.7% and a year-over-year increase of 3.7%. The balance came from international markets, declining 10.2% sequentially and 13.3% year over year.
Margins
The pro forma gross margin for the quarter was 72.9%, up 55 bps from the previous quarter’s 72.4%.
Gross margins have been shrinking over the past year, although the Payments segment saw some expansion in the fourth quarter. The improvement came from an increase in the volume of transactions, as well as the net revenue per transaction. Marketplaces margins are much higher than the Payments segment. However, 60% of current transactions are already in the fixed price format, exposing the company to the severe price competition in the online retail market.
Operating expenses of $998.2 million were higher than the previous quarter’s $1.11 billion. The operating margin was 27.5%, up 203 bps from the 25.4% recorded in the previous quarter. The sequential increase is attributable to lower sales & marketing expenses, lower general & administrative expenses and lower COGS as a percentage of sales, partially offset by higher product development costs as a percentage of sales.
Excluding the impact of restructuring charges, the amortization of intangible assets, employer payroll taxes and Skype-related costs on a tax adjusted basis, the pro forma net income was $480.4 million or 21.9% net income margin, compared to $481.1 million or 20.3% in the previous quarter and $417.6 million or 20.7% in the year-ago quarter.
Including the special items, the GAAP net income was $397.7 million ($0.30 per share), compared to $1.35 billion ($1.02 per share) in the December 2009 quarter and $357.1 million ($0.28 per share) in the March quarter of last year.
Balance Sheet
The company has a solid balance sheet, with cash and short term investments of $4.53 billion, down $415 million in the last quarter. The company generated $418.3 million in cash from operations and spent $152.3 million on capex, netting a free cash flow of $266 million. The company spent $200 million in one-time taxes, which reduced the operating cash flow in the last quarter.
Full-Year Guidance Reiterated
Management expects second quarter 2010 revenue of $2.15-2.20 billion, GAAP EPS of $0.27-0.29 and non GAAP EPS of $0.37-$0.39. Management expects currency to have a significant negative impact on second quarter results.
For the full year, management expects revenue of $8.8-9.1 billion (unchanged), GAAP EPS of $1.29-$1.34 (unchanged) and non GAAP EPS of $1.63-$1.68 (unchanged). The non GAAP EPS excludes intangibles amortization charges of $230-245 million, stock based compensation related charges of $$410-440 million and restructuring charges of $20-25 million.
Conclusion
eBay reported a good quarter helped by currency, which raised its revenue and operating margin by $88.2 million and $37.4 million, respectively. However, the quarter did not include Skype, which contributed 5% and 8% of total revenue in the previous and year-ago quarters, respectively.
Revenues are expected to benefit from management’s new customer-centric approach, under which the company is making technological improvements to its online portals and increasing focus on the fixed price format.
We believe the company will continue to see higher volumes that will be partially offset by higher costs, weaker pricing and shrinking margins.
We have a Neutral rating on eBay shares.
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