eBay Raises the Bar Again

Updated from 10:16 a.m. EDT

Investors bid up eBay ( EBAY) shares Thursday after the Internet standout posted a stronger-than-expected 59% increase in first-quarter sales, nearly doubled its profit and raised forecasts for the rest of the year.

Shares of eBay most recently jumped $4, or 5.4%, to $78.78.

Numerous analysts raised their estimates for eBay after the company increased its own outlook for 2004 for a second time on Wednesday.

"eBay has the most consistent growth record among all consumer e-commerce companies, and we believe that eBay management's execution combined with a great business platform has led to its success," Legg Mason analyst Thomas Underwood wrote in a note. Underwood noted the company's high multiple but reiterated his buy rating. (His firm hasn't done banking with eBay.)

Other analysts were similarly ebullient. "Once again, eBay showed there is incredible leverage in the model, despite the fact the company continues to increase its investment level, and despite increasing customer acquisition costs," Piper Jaffray senior analyst Safa Rashtchy wrote. "eBay's big upside, yet again, showed that the company still has plenty of steam on its core operations and continues to improve with product innovations." (He has an outperform rating on eBay and his firm hasn't done banking with eBay.)

Under generally accepted accounting principles, San Jose, Calif.-based eBay earned $200.1 million, or 30 cents a share, on $756.2 million in sales in the quarter. That was up from net income of $104.2 million, or 16 cents a share, on $476.5 million in revenue in the same period a year earlier.

Excluding charges, eBay would have earned $210.8 million, or 31 cents a share, on a pro forma basis, compared to $116.2 million, or 18 cents a share, a year earlier.

On that basis, analysts polled by Thomson First Call were expectingeBay to earn 26 cents a share on $716.6 million in sales. Meanwhile, eBay had projected it would earn as much as 24 cents a share, or 25 cents a share excluding charges, on $700 million in revenue in the first quarter.

Looking forward, eBay said it expects to earn up to 24 cents a share, or 26 cents excluding charges, on up to $760 million in revenue in the second quarter. Previous second-quarter guidance called for earnings up to 23 cents a share, or 25 cents excluding charges, on $720 million in revenue.

For a second time, eBay raised 2004 guidance, saying it expects to post $1.06 a share in profit, or $1.13 excluding charges, on $3.15 billon in revenue. eBay's previous guidance called for 2004 earnings up to 99 cents a share -- $1.04 excluding charges -- on $3 billion in revenue.

Wall Street analysts were forecastingsecond-quarter pro forma earnings of 26 cents a share on $733.6 million in revenue, and 2004 earnings of $1.09 a share on $3.079 billion in revenue.

eBay continued to show strong growth across all three of its majordivisions. Revenue from eBay's U.S. auctions division increased 39% from a year ago to $326.2 million. International auctions revenue jumped 87% from a year earlier to $257.1 million.

Revenue growth in eBay's payments division was particularly impressive. PayPal payments revenue grew 67% from a year earlier to $155.5 million. Spurred in part by adoption in the U.K., that growth is also significant because the quarter marks the first full one in which eBay also owned PayPal in the year-earlier quarter.

The company's international revenue, which grew slower than in pastquarters, was boosted by a weak dollar relative to other currencies,resulting in a $47.1 million benefit on a year-over-year basis and $18million benefit on a sequential basis.

The company's gross margin -- the difference between what a company charges for services and its direct costs of providing those services -- improved by 1 percentage point from a year ago to reach 82%.

During the first quarter, eBay generated $295.3 million in free cash flow, which represents operating cash flows less capital expenditures. eBay's balance sheet continued to swell, with its cash and short-term investments reaching $1.92 billion, up from $1.72 billion at the end of the year.

Nearly $77 million of the company's operating cash came from the tax benefit eBay receives from the exercise of employee stock options. eBay claims the gains employees see from options exercises as a payroll expense -- a deductible business cost. But the company doesn't expense stock options in its financial statements.

Likewise, stock sales, primarily those from options, generated about $173.1 million directly for eBay -- or 58.6% of free cash flow. When an employee exercises an option, the company receives the proceeds up to the exercise price.

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