After the market closed yesterday, eBay Inc. (EBAY) reported fourth quarter earnings of 40 cents, which was in line with the Zacks Consensus Estimate. eBay saw cost escalation in the last quarter and it was only the better-than-expected revenues that enabled it to meet expectations.
Revenue
Gross revenue of $2.55 billion was up 2.0% sequentially and 15.9% year over year, exceeding the Zacks Consensus Estimate by 2.8% and at the high end of eBay’s guidance range of $2.4-2.5 billion.
Nearly 88% of total revenue was transactions-based, while the remaining 12% came from marketing services. Both transactions-based revenue (up 1.9% sequentially) and marketing services revenue (up 2.6% sequentially) contributed to the revenue upside versus guidance. They were also up 14.8% and 24.0%, 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 gross merchandise volume (“GMV”) during the quarter excluding vehicles volume declined 3.6% sequentially, although it was up 8.4% year over year.
The sequential decline was attributable to seasonality, the incr4ease from the prior year an indication of a much higher level of business at eBay. Payment volumes were again stronger, growing 2.9% and 29.5%, 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. ebay mobile app has been downloaded more than 30 million times in 8 languages and across 190 countries.
Mobile payments through the Paypal Mobile Express Checkout system also grew strongly and eBay stated that the total mobile payment volume was likely to more than double from $750 million in 2010 to $2 billion this year. The
Marketplaces revenue for the quarter increased 1.9% sequentially and 12.0% from the year-ago quarter. The sequential revenue increase was the net impact of a 2.0% increase in transaction revenue and a 1.3% increase in marketing services revenue.
The year-over-year increase was due to a 9.5% increase in transaction revenue and a 25.6% increase in marketing services revenue. Vehicles volume strengthened in the last quarter, increasing 7% sequentially (the second time in five quarters) and 1% from the year-ago quarter (the first time in five quarters).
Active users in Marketplaces were 95.9 million, up by more than a million during the quarter. Marketplaces generated 61% of total revenue.
Payments revenue increased 2.2% sequentially and 22.6% from the year-ago quarter. Revenue from transactions was up 1.8% sequentially and 10.3% year over year, with the revenue generated per transaction increasing sequentially year over year.
The revenue per user dropped slightly from the previous quarter, but was up strongly from a year ago. 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 10.3% sequentially and 16.3% from the year-ago quarter. The Payments segment generated 39% of total revenue. Bill Me Later (“BML”) remained extremely strong, growing 42% year over year.
Revenue by Geography
Around 45% of total revenue was generated in the U.S., representing a sequential increase of 1.9% and a year-over-year increase of 13.6%. The balance came from international markets, which were up 2.1% sequentially and 17.8% year over year.
eBay’s international business benefited from renewed strength in the U.S., a steadily increasing European business (particularly, U.K. and Germany), strength in Australia offset by a slightly slower Asian business. However, eBay attributed the weakness in Asia to some short-term strategic changes being made in Korea and the impact of higher standards for Chinese sellers on eBay.
The pro forma gross margin for the quarter was 71.7%, down 50 bps sequentially and down 122 bps year over year. While volumes were a positive in the last quarter, increasing number of active users and the higher cost per transaction processed negatively impacted the year-over-year comparison.
Marketplaces margins are generally much higher than Payments margins. However, 61% of transactions in the last quarter were under the fixed price format, exposing the company to the severe price competition in the online retail market.
Operating expenses of $1.19 billion were higher than the previous quarter’s $1.15 billion. The operating margin was 25.1%, down 110 bps sequentially and 235 bps from the year-ago quarter. All expenses except S&M increased sequentially as a percentage of sales (S&M was down slightly).
Excluding the impact of restructuring charges, the amortization of intangible assets, Skype-related adjustments and other adjustments on a tax adjusted basis, the pro forma net income was $531.1 million or 20.9% net income margin, compared to $602.6 million or 24.1% in the previous quarter and $480.4 million or 21.9% in the year-ago quarter.
Including the special items, the GAAP net income was $475.9 million ($0.36 per share) compared to $559.2 million ($0.42 per share) in the December 2010 quarter and $397.7 million ($0.30 per share) in the March quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $6.76 billion, up $141.8 million in the last quarter. eBay generated $699.6 million in cash from operations and spent $148.6 million on capex, netting a free cash flow of $551.0 million (down $106 million during the quarter).
Outlook
Management expects second quarter 2011 revenue of $2.55-2.65 billion (flat to up 4% sequentially, up 15-20% year over year), GAAP EPS of 36 to 37 cents and non GAAP EPS of 45 to 46 cents.
For 2011, management expects revenue of $10.6-$10.9 billion (previous $10.3-10.6 billion), GAAP EPS of $1.53 to $1.58 (previous $1.56 to $1.61) and non GAAP EPS of $1.93 to $1.97 (previous $1.90 to $1.95).
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 will further improve customer satisfaction.
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 Incorporated (MA) and other banks (in addition to Google’s Checkpoint).
eBay shares currently carry a Zacks #3 Rank, indicating a short term Hold recommendation.
We believe eBay will continue to see higher volumes, the impact of which will be partially offset by higher costs, weaker pricing and shrinking margins.
Our longer term rating on eBay shares stays Neutral.
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