eBay Posts a Huge Quarter

Updated from 5:28 p.m. EDT on Oct. 16.

eBay (EBAY - commentary - Cramer's Take) reported third-quarter 2007 results after the close last night that were well above consensus for both revenue and pro forma EPS. More importantly, guidance for the December quarter has the Street raising numbers as well.

Revenue in the quarter was $1.89 billion (+30% year over year; +3% quarter over quarter), and pro forma EPS were 41 cents. (GAAP loss per share was $0.69.) The pro forma gross margin was 76.8%, down 200 basis points from a year ago and 100 basis points sequentially. The pro forma operating margin was 31.4%, down 20 basis points year over year and 100 basis points quarter over quarter. Cash from operations was a very solid $630 million, up about $110 million from the prior year. Cash and equivalents increased by $400 million, reaching about $4.0 billion after the repurchase of 15 million shares of common stock. Accounts receivable was essentially up slightly (+$30 million), and days sales outstanding remained at a low 20 days (+ one day).

Within the major business segments, Marketplaces revenue was $1.27 billion, up 25% year over year and 3% quarter over quarter. Gross merchandise value (GMV) increased 14% year over year despite the fact that listings declined 5% from last year. As was the case last quarter, higher closure rates and strong non-GMV-related revenue (i.e,. Classifieds, Shopping.com, StubHub, etc.) is the difference. Within the payments space, revenue was $448 million, up 32% year over year and 4% quarter over quarter. Total accounts increased 34% year over year, and payment volume was up 34%. Penetration of the On-eBay business remained high, but outside merchants services business continues to be very strong (+61% year over year in payment volume). Communications revenue was $97 million, up 94% year over year and 7% sequentially. The number of Skype users increased 81% year over year and 12% quarter over quarter and now stands at 246 million. Total minutes of use per user in the period has declined, however, to 31 minutes, down 46% year over year and 20% quarter over quarter. Lastly, eBay's advertising revenue was $77 million, up 87% year over year and 1% sequentially.

Several of the changes management has installed in the U.S. and German marketplaces have begun to bear fruit. The company is beginning to see listings increase as well as average selling prices. Some areas are seeing better conversion rates as well. These changes will be rolled out more broadly after the first of the year.

Management lamented the need for the asset impairment charge for Skype. The company plans to make a number of changes focused less on expansion, which management believes went too quickly, and more on improving the user experience. Given the declining usage rates over the last several quarters, those sound like good decisions.

The company indicated that, as part of its holiday marketing program, insertion fees for sellers will be reduced by 33% effective through Nov. 5. Admittedly, management is uncertain how this will impact fourth-quarter results, so guidance was characterized as appropriately conservative.

In the fourth quarter, revenue is expected to be in the $2.10 billion to $2.15 billion range, or up 22% to 25% year over year. Pro forma EPS are expected to be 39 cents to 41 cents. Current consensus is for revenue of $2.06 billion and pro forma EPS of $0.38.

When the company reported, the stock was up more than 5% in after-hours trading. By the time management finished the call it was up less than one-tenth of that amount and at one point was actually down. A number of factors played into this deflation. Certainly one was the fact that 4 cents of third-quarter EPS was from a one-time tax benefit, but that still puts earnings 4 cents above consensus.

I think the biggest issue was the laundry list of concerns provided by management as it discussed (generally, no specifics) the 2008 outlook. Maybe I'm wrong, but I don't recall any positives, only things to worry about. Lastly, I think the uncertainty regarding the price cut on insertions for fourth quarter was perhaps exaggerated. Granted, it may turn out to be a negative, but the reverse of that might also be true.

Hey, eBay had a great quarter. We've started to see some improvements in the marketplaces that needed some fixing and the non-marketplace business continues to deliver. Unfortunately, their conference call sounded like the ones Microsoft (MSFT - commentary - Cramer's Take) used to deliver 10 to 15 years ago, when all that company did was worry about what could go wrong. Hopefully, eBay's results from here on in will be just as positive as Microsoft's were way back when.

eBay Preview: Buy It Now?

eBay (EBAY - commentary - Cramer's Take) is scheduled to report its third-quarter 2007 results after the close tomorrow and will have a conference call at 5 p.m. EDT. Current consensus estimates are for revenue of $1.83 billion (+26% year over year; flat quarter over quarter) and pro forma earnings per share of 33 cents.

In the prior quarter, revenue was $1.83 billion (up 30% year over year, up 4% quarter over quarter) and EPS were 27 cents (pro forma 34 cents). The gross margin was 77.3%, down 200 basis points from a year ago and 40 basis points sequentially. The operating margin was 24.9%, up 280 basis points year over year but down 160 basis points quarter over quarter. Cash from operations was $655 million, about a $90 million increase from first quarter and a $140 million increase from the prior year. Cash and equivalents increased by $300 million, reaching about $3.6 billion after the repurchase of 10 million shares of common stock. Accounts receivable was essentially flat with the prior quarter, and days sales outstanding remained at a low 19 days.

Guidance for third quarter was for revenue in the $1.775 billion to $1.825 billion range (up 23% to 26% year over year), with pro forma EPS of 31 cents to 33 cents. For the fiscal year, management raised the low end of its prior revenue guidance to a range of $7.30 billion to $7.45 billion. Pro forma EPS is expected to be around $1.34 to $1.38, a four cent increase. Current consensus for 2007 is $7.49 billion in revenue and pro forma EPS of $1.38.

Since the close of the quarter, the company announced that it will take a $1.4 billion charge in the third quarter as an acknowledgement of the issues with Skype. Part represents an earn-out to the departing CEO, and the remainder is an asset impairment charge.

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At time of publication, Faulkner's The Telecom Connection Model Portfolio was long eBay and Microsoft.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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