After the market closed yesterday, eBay Inc. (EBAY) reported fourth quarter earnings of 45 cents that beat the Zacks Consensus by 3 cents or 8.2%. This was in line with the average positive surprise of 8.2% reported in the four preceding quarters. eBay shares were up 3.02% in response.
The analyst community showed a great deal of confidence in their expectations for eBay, as reflected in the lack of estimate revisions over the past few months. However, eBay reported a positive surprise, helped by cost controls and a lower tax rate.
Revenue
Gross revenue of $2.50 billion was up 10.9% sequentially and 5.2% year over year, in line with the Zacks Consensus and exceeding the high end of eBay’s guidance range of $2.39-2.49 billion. Excluding Skype, eBay’s reported revenue was up 5.6% year over year.
Around 88% of total revenue was transactions-based, while the remaining 12% came from marketing services. Both transactions-based revenue (up 10.2% sequentially) and marketing services revenue (up 16.5% sequentially) contributed to the revenue upside versus guidance. They were also up 5.1% and 6.6%, 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 increased 19.4% sequentially and 5.6% year over year. Payment volumes witnessed even stronger growth, up 20.1% sequentially and 25.8% from last year.
The mobile business continued to look up, with GMV for the year close to $2 billion. eBay stated that its mobile apps have been downloaded more than 30 million times in 8 languages and across 190 countries.
Marketplaces revenue for the quarter increased 8.0% sequentially and 4.2% from the year-ago quarter. The sequential revenue increase was the net impact of a 6.2% increase in transaction revenue and a 17.4% increase in marketing services revenue. The year-over-year increase was due to a 3.2% increase in transaction revenue and an 8.8% increase in marketing services revenue. Vehicles volume remained weak, declining 11% sequentially and 8% from the year-ago quarter. Vehicle volumes have witnessed year-over-year declines in each of the last 5 quarters and sequential declines in four of the last 5 quarters. Active users on the Marketplaces platform were 94.5 million, up by more than a million during the quarter. Marketplaces generated 61% of total revenue.
Payments revenue increased 15.9% sequentially and 22.1% from the year-ago quarter. Revenue from transactions was up 16.1% sequentially and 22.3% year over year, with the revenue generated per transaction increasing sequentially although staying below year-ago levels. However, revenue per user continued to increase both sequentially and year over year, indicating that users are making smaller transactions, but coming back for more. Additionally, the number of users increased yet again from both the previous and year-ago quarters. Revenue from marketing services was up 11.6% sequentially and 16.7% from the year-ago quarter. The Payments segment generated 39% of total revenue.
The Payments platform benefited greatly from eBay’s Bill Me Later (“BML”) initiative, which did particularly well in the last quarter. Total payment volume through BML was up 49% from the prior year, with both eBay and non-eBay customers choosing the payment system. BML handled $1.3 billion payment volumes in 2010 and eBay is optimistic that this number will improve this year.
Revenue by Geography
Around 45% of total revenue was generated in the U.S., representing a sequential increase of 5.8% and a year-over-year increase of 7.3%. The balance came from international markets, which were up 15.5% sequentially and 3.6% year over year.
eBay’s international business benefited from strength in the U.K., Germany and Australia. Europe, which is a net importer from both the U.S. and Asia, witnessed strong demand in the last quarter. Asia did not do as well, mainly because of changing trust standards in China and slowdown in Korea. eBay Fashion did very well not only in the U.S. but also in the U.K. and Germany.
The pro forma gross margin for the quarter was 72.2%, up 66 bps sequentially and down 17 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, 62% 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 $1.15 billion were higher than the previous quarter’s $1.07 billion. The operating margin was 26.2%, increasing 225 bps sequentially although 83 bps from the year-ago quarter. All expenses except G&A were flattish sequentially as a percentage of sales (G&A was down slightly). Therefore, the operating margin improvement was primarily on account of the lower G&A and helped by the slightly stronger gross margin.
Excluding the impact of restructuring charges, the amortization of intangible assets and adjustments related to Skype on a tax adjusted basis, the pro forma net income was $602.6 million or 24.1% net income margin, compared to $470.6 million or 20.9% in the previous quarter and $480.1 million or 20.3% in the year-ago quarter.
Including the special items, the GAAP net income was $559.2 million ($0.42 per share) compared to $431.9 million ($0.33 per share) in the September 2010 quarter and $1.35 billion ($1.02 per share) in the December quarter of last year.
Balance Sheet
The company has a solid balance sheet, with cash and short term investments of $6.62 billion, up $1.26 billion in the last quarter. eBay generated $854 million in cash from operations and spent $197 million on capex, netting a free cash flow of $657 million (up $77 million during the quarter).
Outlook
Management expects first quarter 2010 revenue of $2.4-2.5 billion (flat to down 4% sequentially, up 9-14% year over year), GAAP EPS of 34 to 36 cents and non GAAP EPS of 44 to 46 cents.
For 2011, management expects revenue of $10.3-10.6 billion, GAAP EPS of $1.56 to $1.61 and non GAAP EPS of $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).
We believe eBay will continue to see higher volumes, the impact of which will be partially offset by higher costs and weaker pricing.
eBay shares currently carry a Zacks Rank of #3, indicating a short term Hold recommendation.
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