Earnings Preview: eBay Inc.

eBay Inc. (EBAY - Analyst Report) is scheduled to announce its third quarter fiscal 2012 results on October 17, and we notice limited movement in analyst estimates.

Prior-Quarter Synopsis

eBay’s second quarter 2012 earnings per share (EPS) of 51 cents (excluding one-time items and stock-based compensation) exceeded the Zacks Consensus Estimate by 3 cents on strong top-line growth, the strengthening Marketplaces segment and solid payments business.

The company reported gross revenue of $3.40 billion, up 3.7% sequentially, exceeding consensus expectations of $3.36 billion, aided by improved customer experience. Over 85% of eBay’s total revenue was transactions-based, while the remaining 15% came from marketing services.

Pro forma gross margin was 71.5%, up 87 bps sequentially and down 92 bps year over year. The sequential increase was attributable to higher volumes and lower transaction expense.

Third Quarter Guidance

eBay expects revenue of $3.3–3.4 billion (down 1.4% sequentially and up 13.0% year over year at the mid-point), GAAP EPS in a range of 42 cents – 44 cents and non GAAP EPS in the range of 53 cents – 55 cents.The Zacks Consensus Estimate is pegged at 46 cents, down a penny since the company reported results but still over the range guided by management.

For 2012, management expects revenue of $13.8–$14.1 billion, GAAP EPS of $1.91 to $1.96 and non GAAP EPS of $2.30 to $2.35. The Zacks Consensus Estimate is pegged at $2.03.

Detailed earnings results can be viewed in the blog titled: eBay Delivers Another Good Quarter

Agreement of Analysts

Over the last 30 days, 1 out of the 17 analysts providing estimates made an upward revision, while 2 analysts moved their estimates in the opposite direction both for the third quarter as well as fiscal 2012.

The majority of analysts expect a strong third quarter with revenue and earnings per share coming in at the higher end of the management guidance. They see continued traction in eBay’s U.S. Marketplaces business and continued online and offline share gains in the PayPal segment.

The analysts believe that PayPal is expanding its market opportunity by aggressively enabling mobile payments and expanding Point-of-Sale (POS) offerings. The analysts expect the Payments business to deliver strong total payment value (TPV) and revenue growth, benefiting from mobile payments, the overall strength in eCommerce, as well as positive momentum in Marketplaces. According to management, PayPal expects to process $10 billion in mobile payments this year.

However, a few analysts believe that macro weakness in Europeand weak currency trends could limit upside potential. Hence, they expect management to provide a conservative fourth quarter guidance, in-line or below the consensus estimate of $3.94 billion and $0.68 for revenues and EPS, respectively.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate decreased by a penny to 46 cents for the third quarter but remain unchanged for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate was down by a penny for the third quarter and 4 cents for fiscal 2012.

Recommendation

Aided by growth in its PayPal business and mobile commerce, we expect eBay to report a decent third quarter.

We remain impressed with eBay’s strategy and executionand believe that eBay is well positioned for sustained growth, with both Payments and the Marketplaces business showing signs of improvement.

PayPal, which accounts for almost half of eBay's annual revenue is expanding beyond its online payments service and finding new ways to get a foothold in the offline world. Last year, the company expanded its offline partnerships and announced that PayPal point of sale was gaining traction as few retailers, including Home Depot Inc and Office Depot Inc (ODP) had agreed to accept PayPal as a payment mode.

Recently, eBay inked a deal with Discover Financial Service, which will extend PayPal’s services to 7 million merchants next year. We believe that eBay is expanding its addressable market and taking all the necessary measures for continued growth in mobile payments in the near future.

PayPal has also reinforced its mobile payments segment through the PayPal Mobile Express Checkout system and the Zong acquisition, which are expected to boost mobile payment volumes.

However, we are concerned about the increasing competition from major online retailers, such as Amazon.com (AMZN), as well as many other smaller players. Additionally, Google Inc. (GOOG) has been eyeing the online payment space, thus threatening eBay’s position.

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.

Currently, eBay has a Zacks #3 Rank, implying a short-term Hold rating.