eBay Jitters? Consider CyberSource

Editor's note: This column was submitted by Stockpickr member Kurtis Anders, a university student majoring in accounting and finance.

eBay(EBAY Quote) is feeling the force of its recent disappointing earnings results and gloomy forward guidance. One company's pain might just be another's gain.

Shares of eBay fell hard after the closing bell on Jan. 23, following subpar first-quarter earnings expectations from the Internet auction company. One week later, on Jan. 29, however, CyberSource(CYBS Quote) reported its highest ever quarterly revenue.

The electronic payment services company met or exceeded analysts' expectations throughout all of 2007 and beat by an average of 23% each quarter. I believe this company will be able to capitalize on the enormous future in e-commerce.

Management at the company gave a great conference call, and I believe it can take advantage of the fear that many eBay users have when shopping or transacting business online. CyberSource provides secure electronic solutions to e-commerce businesses.

The company's services allow merchants to accept a wide range of online payment options including credit cards and e-checks. Its business is primarily focused on large enterprises, but the success of its acquisition of Authorize.net is serving as a new growth opportunity in small-business management. Interestingly, this business is growing at a more rapid pace than the larger enterprise business.

On Jan. 8, the company announced the launch of enhanced fraud protection for PayPal Express Checkout. In a recent press release, the company's vice president of strategic markets said, "We've now made it simple for merchants in the United States and the United Kingdom to easily integrate and manage PayPal payments alongside their other payment options, and bring even greater speed and convenience to their customers' shopping experience." Business Development Director Gene Alston noted, "This means more merchants can again access to 164 million accounts worldwide with relative ease."

Fourth-quarter financial highlights were marked by record revenue of $45 million. Billable transactions increased more than 60% over the prior year. In addition, its global acquiring business grew to $15.9 million of total revenue, more than double the revenue for that division in 2006.

A significant milestone for its business was an ability to blow past its expectation of 1 billion transactions in 2007. The company accomplished this goal in November 2007 and actually finished with a 20% higher rate at roughly 1.2 billion transactions for the year.

A very important fact about this milestone was that it did not include the transactions provided by the Authorize.net business, which accounted for an additional two months' worth of transactions for the year. Growth rates in the original CyberSource business were well along the lines of those in 2006 and the addition of Authorize.net resulted in the ability to grow that business at an even greater rate than 2006.

Current large enterprise customers of the company include many world-renowned companies such as British Airways, Google(GOOG Quote), Harvard Business School, Nike.com(NKE Quote), Overstock.com(OSTK Quote), UCLA and new clients such as Air India, Christian Dior, Juniper Networks(JNPR Quote) and La-Z-Boy(LZB Quote). The company was fortunate to renew contracts with Lenovo Group, MIT, Reliance Communications and Sirius Satellite Radio(SIRI Quote).

Clearly, the company has a strong grasp on the e-commerce business and in fact, CyberSource processed about 25% of all U.S. e-commerce transactions. It also processed nearly 20% of all worldwide transactions.

With the current state of the economy, you would have to think that CyberSource's business would slow with it. The answer, in a very strong tone from the company, was that it experienced no material slowdown in December 2007. Management outlined several reasons for the company's ability to weather the storm:

1. Growing Internet accessibility, especially with the increase in broadband capabilities.
2. Accelerating growth outside the U.S.
3. Growing use of Internet in business-to-business transactions.
4. Demographic of the e-commerce shopper implying lower susceptibility to economic hardship.

International growth remains a commitment for the company, and its merchant acquiring business in the U.S. and the U.K. looks to be in a strong position to excel in Europe, Asia and India. India was noted as being a key strong point for the company and was marked by success in the airline and online travel industries. Telecom in India is in a boom phase and the company's strong traction with Bharti Airtel and Reliance Communications looks to strengthen its presence.