eBay Inc. (EBAY - Analyst Report) reported fourth quarter earnings of 63 cents, which exceeded the Zacks Consensus by 2 cents, or 3.7% and more or less in line with the Zacks ESP (expected surprise prediction of 3.3%). Strong holiday sales drove results.
The reinvigorated Marketplaces business and progress with the Payments business is leading to growing optimism about eBay shares.
Gross revenue of $3.99 billion was up 17.3% sequentially and 18.1% year over year, exceeding consensus expectations of $3.98 billion and within eBay’s guidance range of $.3.85-4.00 billion.
Around 86% of total revenue was transactions-based, while the remaining 14% came from marketing services. Transactions-based revenue grew 17.5% sequentially, while marketing services revenue grew 16.2%. Growing 18.7% and 14.9%, respectively from the year-ago quarter, both contributed to the upside versus guidance.
Revenue by Segment
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 grew 17.3% sequentially and 15.9% year over year. International non-vehicle GMV declined 1% on a currency-neutral basis. The overall increase from the year-ago quarter was helped by improved customer experience, success on the mobile platform and particularly strong demand in clothing, accessories, home and garden sales.
Vehicles GMV continued to weaken, declining 13% and 7%, respectively, from the previous and year-ago quarters. Sales through the fixed price format comprised 68% of total sales in the last quarter.
eBay’s Paypal remains the star performer, generating total payment volume (TPV) growth of 18.0% and 24.3%, respectively from the previous and year-ago quarters. TPV on eBay properties was up 18% (on a currency-adjusted basis).
Management has a three-pronged growth plan here, targeting the online, mobile and offline segments. Opportunities abound in the first two areas, while they continue to unfold in the offline segment as well. eBay has been adding a number of retailers over the past few quarters.
eBay ended the year with 23 major retailers including Home Depot (HD - Analyst Report), FootLocker (FL - Analyst Report) and Paypal was live at more than 18,000 retail locations. Its agreements with NCR Corp (NCR - Analyst Report) and Discover will help it to further extend its reach.
eBay’s mobile business touched $13 billion in 2012 (from $4 billion in 2011 and $3 billion more than estimated). Additionally, 4.3 million new users were added during the year. The Paypal Mobile Express Checkout system, eBay Now and the Zong acquisition are expected to boost mobile payment volumes going forward.
Marketplaces revenue for the quarter was up 13.5% sequentially and 15.7% from the year-ago quarter. The sequential revenue increase was the net impact of a 12.2% increase in transaction revenue and a 16.2% increase in marketing services revenue. The year-over-year increase was due to a 15.8% increase in transaction revenue and a 14.9% increase in marketing services revenue. Active users in Marketplaces were 112.3 million, up 4 million during the quarter. Marketplaces generated 51% of total revenue.
eBay’s top-rated sellers accounted for more than 42% of GMV in the U.S., with same store sales growing 20% year over year. Therefore, it is evident that sellers are gaining from coming to eBay and driving more traffic to eBay properties.
Payments revenue increased 12.8% sequentially and 24.3% from the year-ago quarter. Revenue from transactions was up 13.3% sequentially and 23.8% year over year. The revenue per user increased both sequentially and year over year. The revenue per transaction increased slightly on a sequential basis but remained below the year-ago level.
The trend indicates that customers continue to show a preference for a larger number of lower-value items (the slight increase in revenue per transaction in the last quarter appears to be holiday-related). Revenue from marketing services was up 6.9% sequentially and 31.4% from the year-ago quarter. The Payments segment generated 39% of total revenue.
GSI - GSI, which brought in the remaining 10% of revenue, was up 75.3% sequentially and 9.5% year over year. Same store sales at GSI customers increased 19% from last year.
Revenue by Geography
Around 49% of total revenue was generated in the U.S., representing a sequential increase of 19.1% and a year-over-year increase of 17.0%. The balance came from international markets, and were up 15.6% sequentially and 19.2% from last year.
The pro forma gross margin for the quarter was 69.4%, down 120 bps sequentially and up 62 bps year over year. Volumes were a positive in both comparisons. eBay typically sells more low-value items in the fourth quarter, which impacted the sequential comparison. The Payments take rate declined, offsetting both the transaction expenses and the transaction loss rate, which resulted in a flattish transaction margin.
Marketplaces margins are generally much higher than Payments margins. However, 68% 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 few quarters, as the fixed price format is growing much faster than auctions.
Operating expenses of $1.81 billion were up 11.0% sequentially. The operating margin was 24.0%, up 135 bps sequentially and down 144 bps from the year-ago quarter. Both product development and selling costs declined as a percentage of sales, offsetting the weaker gross margin in the sequential comparison. All expenses were flat to slightly up from last year.
Excluding the impact of amortization of intangible assets, the pro forma net income was $834 million or 20.9% of sales, compared to $700 million or 20.6% in the previous quarter and $676 million or 20.0% in the year-ago quarter.
Including the special items, the GAAP net income was $751 million ($0.57 per share) compared to $597 million ($0.45 per share) in the Sep 2012 quarter and $1.98 billion ($1.51 per share) in the Dec quarter of last year.
Balance Sheet and Cash Flow
The company has a solid balance sheet, with cash and short term investments of $9.41 billion, up $273 million during the quarter. eBay generated $1.39 billion in cash from operations and spent $296 million on capex, netting a free cash flow of $1090 million (up from $298 million in the last quarter). eBay also spent $256 million on share repurchases.
Management expects first quarter 2013 revenue of $3.65-3.75 billion (down 7.3% sequentially and up 12.9% year over year at the mid-point), which was just short of consensus expectations of $3.79 billion. The company expects to generate a GAAP EPS of 48 to 50 cents and a non-GAAP EPS of 60 to 62 cents. The EPS guidance is above the Zacks Consensus of 55 cents.
For 2013, management expects revenue of 16.00-$16.50 billion. The GAAP EPS for the year is expected to be $2.23 to $2.29, while the non-GAAP EPS is expected to be $2.70 to $2.75.
eBay’s business continues to show all signs of improvement. 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 and better fulfillment services.
To this, the company is 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 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/payments segment that potentially increase competition for the company. While eBay’s payments business shows great promise and innovation has been very strong here, competition is not far behind.
All things considered, we are impressed with eBay’s strategy and execution and our sentiments are reflected in the Zacks Rank #2 (Buy).