eBay Sees Stronger Trends

eBay Inc. (EBAY - Analyst Report) reported third quarter earnings that beat the Zacks Consensus Estimate by 13 cents. Revenue beat the consensus by 4.6%.

Revenue

Gross revenue of $2.24 billion was up 6.7% sequentially and 5.7% year over year. Around 88% of total revenue was transactions-based, while the remaining 12% came from marketing services. All segments contributed to the revenue increase in the last quarter.

Revenue by Segment

Marketplaces revenue increased 8.4% sequentially, but was down 0.9% compared to the year-ago quarter. The sequential revenue increase was driven by an 8.9% increase in transaction revenue and a 5.7% increase in marketing services revenue.

The year-over-year decline was due to lower transaction value, driven by an 18% decline in vehicles volume and flattish marketing services revenue. The segment generated 61% of total revenue.

Payments revenue increased 2.8% sequentially and 15.2% from the year-ago quarter. Revenue from transactions was up 3.0% sequentially 12.6% year over year, as both the number of active users and the number of transactions increased. The transaction loss rate also declined slightly.

Marketing services revenue was flat sequentially (down 0.6%), but up 86.1% year over year. The segment generated 31% of total revenue.

Communications revenue was up 8.9% sequentially and 29.1% from the year-ago quarter. The 11.1% sequential increase in transactions-based revenue was partially offset by a 14.5% decline in marketing services revenue.

Transactions and marketing revenues increased 26.1% and 95.5%, respectively, from the year-ago quarters. Registered users increased 8% sequentially and 41% year over year, driving the increase.
 
 

Around 45% of total revenue was generated in the U.S., which is an increase of 5.6% sequentially and 1.2% year over year. The balance came from international markets, increasing 7.6% sequentially and 9.7% year over year.

Operating Results

The pro forma gross margin for the quarter was 71.7%, down 63 bps from the previous quarter’s 72.4%. Marketplaces and Payments segments have been seeing shrinking gross margins over the past few quarters, which could be the reason for the decline. The Marketplaces segment typically generates the highest gross margins, followed by Communications and then Payments.

Operating expenses of $887.5 million were higher than the previous quarter’s $835.7 million. The operating margin was 32.1%, down 45 bps from the 32.5% recorded in the previous quarter.

The decline was attributable to the higher COGS (as a percentage of sales) and was offset by slightly lower product development, sales & marketing and general & administrative expenses (as a percentage of sales).



Excluding the impact of restructuring charges, stock compensation expenses, amortization of intangible assets, provision for transaction and loan losses, and the associated tax impact, the pro forma net income was $568.5 million or 25.4% net income margin in the last quarter, compared to $544.9 million or 26.0% in the previous quarter and $694.5 million or 32.8% in the year-ago quarter.

Including the special items, the GAAP EPS was 27 cents compared to 25 cents in the June 2009 quarter and 38 cents in the September quarter of last year.

Balance Sheet

The company has a solid balance sheet, with cash and short-term investments of $3.2 billion, up $144.5 million in the last quarter. The company generated $738.2 million in cash from operations in the last quarter and spent $150 million on capex, netting a free cash flow of around $588 million. It also spent $623 million on share repurchases.

Guidance

Management expects fourth quarter revenue of $2.2-2.3 billion, GAAP EPS of 28-30 cents and non-GAAP EPS of 38-40 cents. The guidance assumes a mid-quarter sale of Skype and does not include the $1.0 billion expected gain on the sale. Fourth quarter revenue and EPS guidance is more or less in-line with the street’s expectations.

Excluding Skype from 2009 results, the company expects to generate full-year 2009 revenues of $7.95 billion to $8.05 billion and non-GAAP EPS of $1.41 to $1.43. This is considerably lower than the consensus EPS expectations of approximately $1.52 based on revenue of $8.5 billion.