eBay Inc. (EBAY - Free Report) plans to cut 325 jobs at its PayPal business unit in order to reduce operational costs. This layoff is an attempt by the company to optimize its cost structure and thereby improve its competitiveness.
The workforce reduction will be conducted primarily in PayPal's product and technology organizations. Management is looking to consolidate its nine product divisions into one large group and will also end relationships with approximately 120 contractors globally.
Along with other unspecified operational changes, the company will incur a pretax restructuring charge of approximately $15 million in the fourth quarter.
We believe that eBay’s existing payment platform, PayPal has done very well in the last few years. To continue its strong global growth momentum and increase its market share, PayPal needs to refine its cost structure. In the last quarter, Paypal continued to be the star performer, generating total payment volume (TPV) growth of 2.1% and 20.1%, respectively from the previous and year-ago quarters.
We believe a leaner cost structure will boost margins and earnings growth in the near future.
eBay is one of the largest online retailers in the world and appears well positioned to grow through strategic acquisitions. The restructuring announcement came a few days after eBay reported strong third-quarter 2012 earnings.
The company’s earnings of 49 cents exceeded the Zacks Consensus by 3 cents, helped by a significantly lower tax rate. Sales of $3.40 billion were flat sequentially and up 14.8% year over year, and at the high end of the company’s guidance range of $3.3–$3.4 billion.
We remain concerned about the increasing competition from major online retailers such as Amazon.com (AMZN - Free Report) as well as many other smaller players. Additionally, Google Inc (GOOG - Free Report) 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 and innovation has been very strong here, competition is not far behind.
Currently, eBay shares carry a Zacks #2 Rank, indicating a short-term Buy rating.