EBay first-quarter earnings preview

The online auctioneer is expected to report good results with a potential upside from the payments segment.

By Zacks.com Apr 17, 2012 9:43AM

By Zacks Equity Research

 

EBay Inc. (EBAY) is scheduled to announce its first quarter fiscal 2012 results on April 18, 2012, and we noticed only one upward movement in analyst estimates.


EBay's fourth quarter 2011 earnings per share of 60 cents (excluding one-time items and stock-based compensation) were better than the Zacks Consensus Estimate of 55 cents, thanks to healthy demand and the positive impact of recent acquisitions. The payments segment and mobile platforms were the high points in the quarter.


The company reported gross revenue of $3.38 billion, up 14.0% sequentially and better than the consensus expectation of $3.32 billion, aided by holiday-driven demand. More than 86% of eBay's total revenue was transactions-based, while the remaining 14% came from marketing services.


The pro forma gross margin was 70.0%, up 31 basis points sequentially and down 221 basis points year-over-year. The sequential increase was due to higher volumes as well as lower transaction expenses and a lower transaction loss rate.


First-quarter guidance

EBay expects revenue of $3.05 billion–3.15 billion (down 8.3% sequentially and up 21.8% year-over-year), GAAP earnings per share of 37 cents to 38 cents and non-GAAP earnings per share of 50 cents to 51 cents. For the first quarter, the Zacks Consensus Estimate for earnings per share is pegged at 43 cents.


For 2012, management expects revenue of $13.7billion–$14.0 billion, GAAP earnings per share of $1.76 to $1.81 and non-GAAP earnings per share of $2.25 to $2.30. For fiscal 2012, the Zacks Consensus Estimate earnings per share is pegged at $1.97.


(Detailed earnings results can be viewed in the blog titled: eBay Guides Above Estimates)


Agreement of analysts

Out of the 15 analysts providing estimates for the first quarter, none revised the estimate in the last 30 days. Over the same period, only one analyst made an upward revision for fiscal 2012.


The majority of analysts expect a strong first quarter with earnings per share coming ahead of the Zacks Consensus at 52 cents and the company's guidance range of 50–51 cents. They see continued traction in eBay's Marketplace business and continued online and offline share gains in the PayPal segment.


The analysts believe that the extra shopping day in February and mix-shift to fixed price should help overall growth in the quarter. They believe that PayPal is expanding its market opportunity by aggressively enabling mobile payments and launching its Point-of-Sale (POS) offering. The analysts expect margins to continue to expand and are waiting for management comments on the progress/roll-out of point-of-sale business.


However, a handful of analysts remain concerned about the relative weakness in merchant services total payment value growth due to the continued negative impact of foreign currency and lack of recovery in the rate of cross border commerce in eBay's market. They believe that FX headwinds this quarter could again impact eBay's cross-border trade, which accounts for approximately 20% of total gross merchandise volume.


Magnitude of estimate revisions

In the past 30 days, the Zacks Consensus Estimate earnings per share remained intact for the first quarter but increased a penny to $1.97 for fiscal 2012.


Over the 90-day period, the Zacks Consensus Estimate earnings per share fell 2 cents each for the first quarter as well as fiscal 2012. Therefore, negative sentiments appear to have outweighed the positive post fourth-quarter earnings.


Recommendation

We expect eBay to report another good quarter with a potential upside from payments and remain impressed by its business strategy and execution.


We believe eBay's PayPal is well positioned for sustained growth and the marketplaces business is also showing signs of improvement. On the PayPal side, the recent launch of PayPal Here and the upcoming introduction of the new wallet are quite encouraging. Additionally, PayPal had announced its initial POS test with Home Depot in the fourth quarter. This would considerably increase PayPal's addressable market going forward.


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 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 retail space, threatening eBay's dominance.


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 #2 Rank, implying a short-term "buy" recommendation.

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