eBay Inc. (EBAY - Analyst Report) shares slumped following its earnings report, despite the fact that the company’s earnings were ahead of the Zacks Consensus Estimate.
The company’s decision to repatriate $6 billion in offshore cash by paying $3 billion in taxes was the most important part of the announcement. Although management didn’t say what justified the action, they alluded to increased financial flexibility, possibility of acquisitions, and increased investment in Paypal and mobile.
The numbers in detail-
Gross revenue of $4.27 billion was down 5.9% sequentially and up 13.7% year over year, slightly ahead of our expectations of around $4.23 billion and in the middle of eBay’s guidance range of $4.15-4.25 billion.
The bulk of revenue (86%) continues to come from transactions, with the balance coming from marketing services. Both categories grew double-digits from the year-ago quarter but declined sequentially on account of negative seasonality.
eBay has three segments: Marketplaces, which refers to the revenue earned from the sale of goods available on eBay properties; Payments, which refers to revenues generated through Paypal; and Enterprises, which comprise mainly of services rendered following the acquisition of GSI.
The three segments generated 49%, 42% and 9% of quarterly revenue, respectively. As may be expected, the Marketplaces segment took the biggest hit, declining 6.3% sequentially, while the other two segments were flat. Marketplaces, Payments and Enterprise revenue jumped 10.1%, 19.2% and 66.9% from year-ago levels.
Both U.S. and International revenue declined sequentially and grew year over year. But the decline in international was much less at 3.7%. U.S. and International revenue grew 46.9% and 53.1% year over year to around 47% and 53% of total revenue, respectively.
eBay’s core gross merchandise volume (GMV) during the quarter was down 4.5% sequentially while growing 12.1% year over year (a relatively steady rate). GMV grew 11% on a currency-neutral basis (the deceleration in the U.S. was offset by strength in International). Active users grew very strongly from both the previous and year-ago quarters. Sales through the fixed price format comprised 76% of GMV in the last quarter. Top seller same-store sales were up 19%.
eBay’s Paypal remains strong, generating total payment volume (TPV) growth of 0.1% and 26.7% (20% on a currency-adjusted basis) from the previous and year-ago quarters, respectively. TPV strength in the last quarter was on account of the addition of Braintree and increased Paypal adoption by merchant sites all over the world and traction on the mobile platform. Paypal penetration on eBay grew from 51% to 53%.
eBay’s enabled commerce volume (ECV) shrank 1.9% sequentially but stayed 24.2% above the year-ago level.
Mobile commerce volume jumped 70% from last year to touch $7 billion and eBay won 6.5 million new mobile customers.
The pro forma gross margin for the quarter was 68.9%, up 39 bps sequentially and down 88 bps year over year. Mix likely impacted the sequential comparison. A slightly higher take rate and lower transaction loss rate helped the year-on-year comparison. This is the main reason for the gross margin decline despite such a strong jump in volumes. The Payments transaction margin expanded as a result. Gross profit dollars dropped 5.4% sequentially and grew 12.3% year over year.
Operating expenses of $1.95 billion were down 1.3% sequentially and up 13.7% from last year. The operating margin shrank 177 bps and 89 bps, respectively from the previous and year-ago quarters to 23%. The changes were mostly volume-related, but product development costs grew more significantly.
Excluding the impact of intangibles amortization on a tax-adjusted basis as well as the one-time tax item, pro forma net income was $784.4 million or 18.4% of sales compared to $923 million or 20.4% in the previous quarter and $722 million or 19.3% in the year-ago quarter.
Including the special items, the GAAP net loss was $2.33 billion ($1.82 per share) compared to income of $850 million ($0.65 per share) in the Dec 2013 quarter and $677 million ($0.51 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 $7.84 billion, down $1.18 billion during the quarter. eBay generated $1.17 billion in cash from operations and spent $206 million on capex, netting a free cash flow of $968 million (down from $1.432 billion in the last quarter). eBay also spent $1.8 billion on share repurchases.
Management expects second quarter 2014 revenue of $4.325-4.425 billion (up 2.7% sequentially and 12.8% year over year at the mid-point), which was just short of consensus expectations of $4.40 billion. The company expects to generate a GAAP EPS of 51 to 53 cents and a non GAAP EPS of 67 to 69 cents. The EPS guidance is much better than the Zacks Consensus of 60 cents.
For 2014, eBay expects revenue of $18-18.5 billion (maintained), with GAAP earnings of $0.04 to $0.09 (down from $2.40-$2.45) and non-GAAP earnings of $2.95-$3.00 (maintained). The one-time tax in the last quarter is responsible for the lower GAAP earnings number for the year.
eBay reported a solid quarter with both earnings and guidance beating our expectations. What took everyone by surprise was the cash repatriation, so everyone will be tracking the use of this cash. We tend to think that the investment will be on the Payments side, whether through acquisitions, advertising and promotion, or product development.
The company has already taken all the necessary measures to boost the marketplaces business, beginning with the fixed price format, moving on to wooing big sellers and customers, improving the technology and navigation of its properties, investing in better fulfillment services and specially focusing on mobile customers. Its drive to provide complete online solutions for traditional retailers should further add to this growth.
It goes without saying that major online retailers, such as Amazon.com (AMZN - Analyst Report) are not going to make things easy for eBay. Additionally, Google Inc has been making some plays in the online retail/payments segment that potentially increase competition for the company. While eBay’s marketplaces business is back on track and the payments business is well ahead of the competition, execution remains something to watch, which is the reason the shares carry a Zacks Rank #3 (Hold).
Safer bets in the sector are Chinese ecommerce company E-Commerce China Dangdang Inc. (DANG - Snapshot Report), which carries a Zacks Rank #1, or IAC Interactive (IACI - Snapshot Report) and Orbitz Worldwide (OWW - Snapshot Report), both of which carry a Zacks Rank #2.