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eBay Miss Drives Down Shares

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eBay Inc. (EBAY - Free Report) reported second-quarter earnings of 52 cents, which missed the Zacks Consensus by a couple of cents, or 3.7%. Share prices plunged following the announcement and opened 6.7% lower today.


Gross revenue of $3.88 billion was up 3.4% sequentially and 14.1% year over year, more or less in line with the Zacks Consensus Estimate of $3.89 billion and at the high end of eBay’s guidance range of $3.80-3.90 billion.

Over 85% of total revenue was transactions-based, while the remaining 15% came from marketing services. Transactions-based revenue grew 2.4% sequentially, while marketing services revenue grew 10.4%. Growing 14.4% and 12.3%, 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 was flattish sequentially while growing 13.1% year over year. Non-vehicle GMV grew 13% on a currency-neutral basis (U.S. alone was 16%, so there was some drag in international). The overall increase from the year-ago quarter was helped by better customer experience, as site improvements continued and mobile engagement grew. The clothing, accessories, home and garden categories remained the strongest drivers. Vehicles GMV grew 6% sequentially, while declining 11% from the year-ago quarter. Sales through the fixed price format comprised 69% of GMV in the last quarter.

eBay’s Paypal remains strong, generating total payment volume (TPV) growth of 4.3% and 24.3% (25% on  currency-adjusted basis) from the previous and  year-ago quarters, respectively. TPV strength in the last quarter was on account of increased Paypal adoption by merchant sites all over the world (up 29% on a currency-adjusted basis) and a 160 bp increase in Paypal penetration on eBay properties.

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. Its agreements with NCR Corp (NCR - Free 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, $3 billion more than estimated). The company stated that around 30% of new users came from mobile platforms in the last quarter. Mobile brought 3 million new users, which was an increase of 90% from last year. Better technology and improved user experience should increase engagement on eBay properties.  

Marketplaces revenue for the quarter was up 2.2% sequentially and up 10.3% from the year-ago quarter. The sequential revenue decline was the net impact of a 18% increase in transaction revenue and a 4.3% increase in marketing services revenue. The year-over-year increase was due to a 9.8% increase in transaction revenue and a 12.7% increase in marketing services revenue. Active users in Marketplaces were 119.7million, up 3.5 million during the quarter. Marketplaces generated 52% of total revenue.

eBay’s top-rated sellers accounted for more than 45% of GMV in the U.S., with same store sales growing 22% year over year.

Payments revenue increased 4.9% sequentially and 19.7% from the year-ago quarter. Revenue from transactions was up 2.8% sequentially and 31.9% year over year. The revenue per user increased both sequentially and year over year. The revenue per transaction also increased from both the previous and year-ago quarters. The trend indicates that customers are gradually increasing the value of goods purchased on eBay and are also increasingly coming back for more. Revenue from marketing services was up 31.9% sequentially and 21.1% from the year-ago quarter. The Payments segment generated 42% of total revenue. Offline adoption in the U.S. is on the rise, with 50 new merchants signing up through the Discover network.

Enterprise- This is the re-branded GSI (a commerce partner for retailers and brands), bringing in the remaining 6% of revenue. Segment revenue was up 4.2% sequentially and 11.3% from the year-ago quarter. Same store sales at GSI customers increased 19% from last year.

Revenue by Geography

Around 48% of total revenue was generated in the U.S., representing sequential and year-over-year increases of 4.5% and 16.1%, respectively. The balance came from international markets, which were up 2.5% sequentially and 12.3% from last year.


The pro forma gross margin for the quarter was 68.8%, down 98 bps sequentially and 275 bps year over year. Volumes were a positive in both comparisons. The Payments transaction margin was flat sequentially, but down from last year due to the combined effect of a lower take rate, lower transaction expenses and a higher loss rate.

Operating expenses of $1.83 billion were up 6.8% sequentially. The operating margin was 21.5%, down 245 bps sequentially and 202 bps from the year-ago quarter. All expenses increased as a percentage of sales from the previous quarter, though S&M declined from the year-ago quarter.

Excluding the impact of amortization of intangible assets and tax adjustments, the pro forma net income was $679 million or 17.5% of sales, compared to $722 million or 19.3% in the previous quarter and $669 million or 19.7% in the year-ago quarter.

Including the special items, the GAAP net income was $640 million ($0.49 per share) compared to $677 million ($0.51 per share) in the Mar 2013 quarter and $692 million ($0.53 per share) in the Jun quarter of last year.

Balance Sheet and Cash Flow

The company has a solid balance sheet, with cash and short term investments of $10.44 billion, up $1.03 billion during the quarter. eBay generated $1.01 billion in cash from operations and spent $353 million on capex, netting a free cash flow of $658 million (up from $638 million in the last quarter). eBay also spent $466 million on share repurchases.


Management expects third quarter 2013 revenue of $3.85-3.95 billion (up 0.6% sequentially and 14.6% year over year at the mid-point), which was short of consensus expectations of $3.97 billion. The company expects to generate a GAAP EPS of 49 to 51 cents and a non GAAP EPS of 61 to 63 cents. The EPS guidance is better than the Zacks Consensus of 55 cents.

For 2013, management expects revenue of 16.00-$16.50 billion (maintained). The GAAP EPS for the year is expected to be $2.21 to $2.26 (lowered from $2.23 to $2.29), while the non GAAP EPS is expected to be $2.70 to $2.75 (maintained).


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 investing in better fulfillment services.

It goes without saying that major online retailers, such as (AMZN - Free Report) are not going to make things easy for eBay. 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, although we recognize certain headwinds related to Europe/Asia. Our sentiments are reflected in the Zacks Rank #3 (Hold) allotted to the shares.

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