eBay Inc. (EBAY - Analyst Report) reported third quarter earnings of 33 cents, including share-based compensation. Earnings excluding SBC came in at 60 cents, better than the Zacks Consensus of 55 cents. Shares appreciated 2.44% in after-hours trading.
The quarter was a good one for eBay, helped by holiday-driven demand and the impact of recent acquisitions was also positive. The Payments segment and mobile platforms remain the high points.
Gross revenue of $3.38 billion was up 14.0% sequentially and 35.5% year over year, exceeding consensus expectations of $3.32 billion and eBay’s guidance range of $3.20-3.35 billion. eBay’s strategy of moving traffic to bigger sellers appears to be paying off, as the improved customer experience seems to be having a positive impact on results.
Nearly 86% of total revenue was transactions-based, while the remaining 14% came from marketing services. Both transactions-based revenue (up 14.2% sequentially) and marketing services revenue (up 12.3% sequentially) contributed to the revenue upside versus guidance. They were also up 32.5% and 54.9%, 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 core gross merchandise volume (“GMV”) during the quarter excluding vehicles volume was up 12.4% sequentially and 9.6% year over year. Volumes were helped by the holiday season, although the growth rate lagged that in the year-ago quarter. Payment volumes strengthened again, growing 14.0% and 24.2%, respectively, from the previous and year-ago quarters.
eBay’s mobile business had a good quarter, with sales touching $4 billion in 2011, in-line with its original expectations. However, the fourth quarter was likely below expectations, since the company estimated sales of $5 billion at the end of the previous quarter. This compares with $2 billion generated in 2010.
Mobile payments through the Paypal Mobile Express Checkout system and the Zong acquisition are expected to boost mobile payment volumes going forward. eBay currently expects total mobile payment volume to increase to $7 billion in 2012.
Marketplaces revenue for the quarter jumped 7.2% sequentially and 16.3% from the year-ago quarter. The sequential revenue increase was the net impact of a 6.6% increase in transaction revenue and a 9.9% increase in marketing services revenue. The year-over-year increase was due to a 14.6% increase in transaction revenue and a 24.1% increase in marketing services revenue.
However, vehicles volume suffered, declining 13% sequentially and 3% from the year-ago quarter. Marketing services continued to benefit from the addition of GSI in the June quarter. Active users in Marketplaces were 100.4 million, up by 1.7 million during the quarter. Marketplaces generated 53% of total revenue.
eBay’s top-rated sellers now account for around 50% of GMV in the U.S., with same store sales growing 19% year over year. Therefore, sellers are gaining from coming to eBay and driving more traffic to eBay properties. Technology improvements and deduplication of listings are helping the process.
Payments revenue increased 12.0% sequentially and 27.6% from the year-ago quarter. Revenue from transactions was up 12.0% sequentially although down 24.9% year over year, with the revenue generated per transaction dropping from both the previous and year-ago quarters.
However, the revenue per user increased nicely from both the previous and year-ago quarters despite the fact that the number of users increased yet again. The numbers seem to indicate that customers showed a preference for to a larger number of lower-value items.
Revenue from marketing services was up 11.5% sequentially and up 84.2% from the year-ago quarter. The holiday season helped drive sales. The Payments segment generated 37% of total revenue.
GSI -- Last year, eBay closed the acquisition of GSI, which brought in the remaining 11% of revenue, up from a 7% contribution in the preceding quarter. Toys, health and beauty products drove sales in the last quarter.
Revenue by Geography
Around 49% of total revenue was generated in the U.S., representing a sequential increase of 16.6% and a year-over-year increase of 48.8%. The balance came from international markets, which were up 11.5% sequentially and 24.6% year over year.
Overall, the U.S., China and the U.K. grew, while other regions in Europe, such as Germany slowed.
The pro forma gross margin for the quarter was 70.0%, up 31 bps sequentially and down 221 bps year over year. Volumes were a positive in both the sequential and year-over-year comparisons. However, eBay sold more low-value items, which were resulted in a slight negative. The Payments segment was very strong however, with the higher take rate being helped by lower transaction expenses and a lower transaction loss rate.
Marketplaces margins are generally much higher than Payments margins. However, 64% of transactions in the last quarter were under the fixed price format. The share of the fixed price format has been more or less stable to slightly growing for the last four quarters, which basically means that the company is now much more exposed to the severe price competition in the online retail market.
Operating expenses of $1.51 billion were higher than the previous quarter’s $1.40 billion. The operating margin was 24.8%, up 237 bps sequentially and down 141 bps from the year-ago quarter. The sequential improvement was largely on account of lower S&M expenses as a percentage of sales, although all except cost of sales declined. S&M was the only expense to have declined from the year-ago quarter.
Excluding the impact of restructuring gains, acquisition-related costs, the amortization of intangible assets, the gain on sale of Skype and other items on a tax-adjusted basis, the pro forma net income was $437.0 million or 12.9% net income margin, compared to $526.8 million or 17.8% in the previous quarter and $602.6 million or 24.1% in the year-ago quarter.
Including the special items, the GAAP net income was $1.98 billion ($1.51 per share) compared to $490.5 million ($0.37 per share) in the September 2011 quarter and $559.2 million ($0.42 per share) in the December quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $5.93 billion, up $1.92 billion in the last quarter. eBay generated $982.3 million in cash from operations and spent $291.6 million on capex, netting a free cash flow of $690.7 million (up from $525.6 million in the last quarter). Other important uses of cash were $67.9 million on acquisitions and $249.9 million on share repurchases. Cash received for Skype was $2.27 billion.
Management expects first quarter 2012 revenue of $3.05-3.15 billion (down 8.3% sequentially and up 21.8% year over year at the mid-point), GAAP EPS of 37 to 38 cents and non-GAAP EPS of 50 to 51 cents. Revenue guidance was below consensus expectations of $3.16 billion, although the EPS is stronger than the estimated 45 cents.
For 2011, management expects revenue of $13.7-$14.0 billion, GAAP EPS of $1.76 to $1.81 and non-GAAP EPS of $2.25 to $2.30.
eBay’s business continues to show all signs of a turnaround. Both Payments and Marketplaces are showing improving trends versus the year-ago quarter, an indication of the changing business profile.
We think eBay has taken all the necessary measures, beginning with the fixed price format, moving on to wooing big sellers and customers, and then improving the technology and navigation of its properties.
To this, the company has now started adding key capabilities through acquisitions. For instance, GSI brought fulfillment services, while Zong brought capabilities in online payment systems.
At the same time, we remain concerned about increasing competition from major online retailers, such as Amazon.com (AMZN - Analyst Report), as well as many other smaller players. Additionally, Google Inc has been making some plays in the online retail space that potentially increase competition for the company. While eBay’s payments business shows great promise, here too competition may be expected to pick up as banks and other companies announce their own payment systems and Google’s digital wallet gathers steam.
We are impressed with eBay’s strategy and execution, despite the fact that it could face near-term hurdles and of course increasing competition. Our sentiments are reflected in the Zacks rank of #3, implying a hold rating in the short term (1-3 months).