eBay: PayPal Carries Earnings, Even As Marketplaces Segment Continues To Struggle

by Trefis Team
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eBay (NASDAQ:EBAY) posted lackluster results in Q4 2014, with revenue growth at 9%, driven by high growth within the payments business, as the marketplaces segment continued to be beset by various challenges. Its GAAP operating margin fell by 100 basis points annually to 21.6% in Q4, due to rise in sales and marketing and product development expenses, which was partially offset by leverage in general & administrative expenses. For the full year 2014, its revenue stood at $17.9 billion, which represented a year-over-year increase of 12%, and its non-GAAP EPS was recorded at $2.95.

A number of strategic announcements were also made during the earnings call. The company is exploring a sale or IPO for its enterprise business. It also plans to cut around 2,400 jobs (representing around 7% of its employee base) in the near-future to simplify its organizational structure and to reduce costs. eBay recently entered into a stand-still agreement with its largest active shareholder Carl Icahn, and a number of new additions to the Board of Directors were also announced.

The management expects revenue to rise by 4% to 7% in 2015 to around $18.9 billion (at the mid-point). And the non-GAAP EPS is estimated at $3.05 – $3.15 in 2015. The top-line growth is expected to be driven by ongoing momentum in the payments business, as the performance in the marketplaces segment could worsen during the first half of 2015. We believe the continued weakness in the marketplaces segment is discouraging, as it has come on the top of a strong holiday season. And it could indicate that eBay is unable to compete effectively in a rapidly changing competitive environment. While the company is taking a number of measures to reinvigorate its growth, we will have to wait for a few more quarters to see the impact of these strategies.

We are in the process of revising our $67 price estimate for eBay’s stock.

See our complete analysis for eBay

Marketplaces Segment Results Disappoint As Challenges Persist

As we expected, sales growth in the eBay’s marketplaces segment further deteriorated to 1% during the fourth quarter of 2014, as compared to 11%, 9% and 6% increase seen in Q1, Q2 and Q3 respectively. On a FX- neutral basis, revenue growth came in slightly better at 5%. eBay continued to face traffic-related challenges, as the password reset continued to cause friction among existing buyers, and SEO changes impacted new user growth on the platform. A four point decline (on a currency neutral basis) in the average selling price on the platform, due to the addition of lower priced items and change in user demographics, also hit overall sales. Finally, strengthening of the U.S. currency impacted eBay’s cross-border trade business.

The management expects business in this segment to get worse in the near-term, before showing improvement in the second half of 2015. Currency-neutral revenue growth in this segment is forecast in the range of 0% to 5% during 2015, and the segment margin is expected to be between 37% and 39%. We think these results are disappointing as a lack of growth during the holiday season indicates eBay is losing ground to other e-commerce giants (such as Amazon) and unable to attract buyers to the site. While eBay plans to accelerate growth in this segment through marketing, improvement in product design, SEO optimization, enhanced focus on core shoppers, and investments in the deals business, we’d have to wait for a few more quarters to see whether these strategies could reinvigorate growth in this segment.

Rapid Growth At PayPal Carried Fourth Quarter Earnings

eBay’s payments business reported stellar growth during Q4 2014, with 18% and 24% increase in revenue and net total payment volume (TPV) respectively. Bolstered by 4.6 million new active registered accounts, the total number of payments grew by 25% during the fourth quarter. Merchant services’ TPV rose by 33%, as compared to a mere 3% growth for on-eBay TPV, owing to increase in merchant coverage and growth at the Braintree business. Mobile payments volume rose by 58%, and accounted for over 20% of the total volume during the quarter. However, the margin within this segment came down to 22.0% during Q4 2014, as compared to 25.7% in a similar period a year ago. Investments in several areas — such as Braintree, product innovation and marketing, coupled with one-time compliance costs  —  caused this decline in margin.

The management estimates FX-neutral growth within this segment during 2015 to be between 15% and 18%. We expect results to be at the high-end of this guidance range, fueled by rapid growth in the payments business (especially mobile payments), an expansion in the Braintree business, product innovations (such as One Touch payments), and PayPal’s leading position in the payments market. Margins are expected at around 24% to 25% within this segment during 2015.

The expected spin-off of this segment later this year, will further accelerate growth in our view, as it will fasten decision making, sharpen strategic focus, and lead to more effective management of cost structure. PayPal, post the spin-off, will carry around $5 billion of net cash (according to the company’s recent plans). We believe this will leave PayPal with sufficient resources to leverage growth opportunities and tackle challenges in the future.

Strategic Options Being Explored For The Enterprise Segment

eBay’s enterprise segment, which comprises for less than 10% of overall revenues, saw 9% revenue growth during the quarter. During the earnings call, the management guided to a partial or complete sale or IPO of this business, due to lack of synergies in this segment with eBay’s other businesses. No other details were divulged on this proposed strategy.  We think the company is taking the right steps in divesting this business, since a greater strategic focus is required to tackle the headwinds in the marketplaces segment.

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