eBay Inc. (EBAY Quick QuoteEBAY - Free Report) reported second-quarter 2016 earnings of 36 cents per share, matching the Zacks Consensus Estimate of 36 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Management sounded upbeat 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, and focus on discovery-based user experience to name a few.

eBay seeks to attract more customers to its online properties, engage them and thus generate revenues. Therefore, the best way to understand the business is through its revenue/volume growth, customer growth, revenue per customer and cash flow.
 

Revenues

Gross revenue of $2.23 billion was up 5.7% on a year-over-year basis (up 7% on an Fx-neutral basis) and beat the Zacks Consensus Estimate of $2.17 billion.

In the second quarter, the Marketplace platforms contributed $19.8 billion of GMV and $1.8 billion of revenue. On the other hand, StubHub also showed signs of accelerated growth with contribution of $ 1.1 billion of GMV, up 35% on a year over year basis and revenue of $0.2 billion up 40% on a year over year basis.

Gross Merchandise Volume (GMV) grew 6% year over year on an Fx-neutral basis. Active buyers/customers totaled 164 million, flat sequentially but up 6% from the year-ago quarter. By geography, the U.S. generated $8.5 billion of GMV, up 5%, accelerating two points versus Q1. The acceleration was driven equally by Marketplace and StubHub. International delivered $12.3 billion of GMV, up 6% year-over-year.

Management said that SEO traffic increased during the quarter.

Margins

Pro-forma gross margin for the quarter was 78.1%, down 164 basis points (bps) year over year but up 21 bps sequentially.

Cost of revenue increased 160 basis points on a year-over-year basis that was driven primarily by the addition of PayPal processing costs and the impact of foreign exchange.

Adjusted operating expenses of $1.21 billion increased 7.4% from the prior–year quarter and 16.7% sequentially. Operating margin shrank 249 bps year over year and 552 bps sequentially to 23.7%.

Excluding the impact of intangibles amortization and other items on a tax-adjusted basis, pro-forma net income came in at $411 million compared with $396 million in the year-ago period.

Including the special items, GAAP net income was $437 million (38 cents per share) compared with $430 million (35 cents per share) in the year ago quarter.

Balance Sheet and Cash Flow

eBay’s balance sheet is highly leveraged, with total debt of $9.05 billion eclipsing the cash and short-term investments balance of $8.09 billion. The company generated $764 million in cash from continuing operations and spent $147 million on capex. Share repurchases totaled $500 million.

Outlook

For the third quarter of 2016, eBay expects revenues to grow 6%–7% on an Fx-neutral basis to $2.16 billion – $2.19 billion. The Zacks Consensus Estimate is pegged at $2.17 billion. Non-GAAP earnings are expected within 42 cents–44 cents. The Zacks Consensus Estimate is pegged at 36 cents. GAAP earnings per share from continuing operations are expected in the range of 35 cents–37 cents.

In 2016, eBay expects revenues to grow 5%-6% on an Fx-neutral basis to $8.85 billion – $8.95 billion.

Zacks Rank & Stocks to Consider

eBay has a Zacks Rank #3 (Hold). Better-ranked stocks include EVINE Live Inc. (EVLV Quick QuoteEVLV - Free Report) and Stamps.com Inc. , both sporting a Zacks Rank #1 (Strong Buy) and The Priceline Group Inc. , carrying a Zacks Rank #2 (Buy).

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