eBay pleasantly surprised people yesterday by not completely screwing the pooch.
The core marketplace business is still very weak but may have begun to stabilise in recent weeks. PayPal is still growing, albeit more slowly than expected. Skype revenue accelerated and is now over a $600 million run-rate. This is important because Skype’s performance over the next year will determine how much shareholders get when it goes public next year.
eBay is still printing money (thus the EPS upside), which is comforting. But this is actually part of the problem. eBay’s pricing to sellers is now too high relative to many other alternatives out there, and that is hurting the company’s competitiveness. We think eBay should cut prices in the marketplace business across the board and create more value for sellers. This would hammer cash flow in the near-term, but it would likely restore eBay’s long-term value proposition for sellers.
Thoughts from Imran Khan and Doug Anmuth:
Imran Khan, JP Morgan
eBay announced 1Q’09 results broadly in line with our model. Revenue was $2.02B, 1% above our number, and EPS of $0.39, a $0.03 beat. Going forward, we are keeping our estimate essentially unchanged, and flowing through the 1Q EPS beat for a F’09 EPS estimate of $1.53, up from $1.50. Our key takeaways:
- Marketplaces metrics mixed. GMV declined 20% Y/Y, below our estimate of an 18% decline, with GMV excluding Vehicles down 16% (worse than 4Q’s 12% decline). We estimate Auctions GMV fell ~29% Y/Y, while Fixed-Price GMV was ~6% lower. Revenue declined at a slower pace than GMV, helped by a higher take rate. We continue to believe a Marketplaces turnaround will be slowed by a tough competitive environment and the structural challenges faced by the Auctions business.
- PayPal continues to grow; slightly below our expectations. We are impressed with the unit’s continued growth in a very tough environment, though Y/Y TPV growth of 10% and Payments Transaction revenue growth of 8% were both ~1% short of our model. We believe eBay is right to focus on PayPal as its primary growth driver; nonetheless, we remain sceptical of a trajectory to get to the company’s F’11 revenue target of $4-5B; our raised F’10 estimate calls for combined PayPal revenue of $3.1B (implying 15% Y/Y growth next year).
- Advertising revenue hit by tough climate. Marketing Services and other revenue was down 3%, with a strong performance from classifieds offset by a 35% decline Y/Y at Shopping.com. The company noted flat Y/Y revenue on its text and graphical partnerships due to declines in page views and CPCs. We are modelling a 1% increase in Marketing Services & Other revenue for F’09.
- Cost containment drives margin upside. Sales & Marketing expense was 20% of revenue, down from 23.5% in 1Q’08, and pro forma operating margin of 30.7% was significantly better than our 29.0% estimate. eBay remains focused on costs, and we now expect F’09 operating margin at 30.0%, up from 29.5%.
- Reiterate Neutral. Due to ongoing challenges to the business, we reiterate our Neutral rating. In view of a slight increase in our F’10 estimates, we are tweaking our price target to $15, from $14.
Doug Anmuth, Barclays
We maintain our 2-EW rating on eBay & would not chase shares at current levels, but there are some positive signs around near-term stabilisation, Mktplace quality, & tighter cost controls. We are not yet seeing incremental buying on platform & lower margins in 2H09 could limit earnings capability. We also blv. structural challenges remain that will curb rebound even in better macro. PT goes from $14 to $15 on 10x 2009E PF EPS of $1.48.
- Mgmt commentary on 2H09 likely to be a sticking point. Our take: 1) GMV declines will improve in the back half on easier comps, not stay stable at down 20%; 2) shift to higher quality sellers does remove high margin final value fees revenue as does continued pressure on high margin adv revs. Maybe a bit conservative, but we think 2H09 earnings will be curbed by these factors.
- GMV declined 20% Y/Y in 1Q09, but likely exited 1Q at a better clip given stabilisation in back half of qtr & continuation of trend into 2Q.
- PayPal Merchant Services 30% organic growth was strong & PayPal is benefiting from BML integration to expand merchant footprint.
- Our 2009 GMV now down 14% Y/Y w/PF EPS at $1.48 & 2010 at $1.52.
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