- eBay reported strong Q1 2016 numbers, beating analyst estimates on both the top line as well as bottom line.
- The company delivered a third consecutive beat following the PayPal spin-off.
- eBay made significant progress on structured data and SEO efforts, which should aid growth over the coming quarters.
eBay Inc. (NASDAQ:EBAY) delivered a strong Q1 2016 earnings report recently, outperforming the street's estimates on both top line as well as bottom line. The company reported Non-GAAP EPS of 47 cents/share and revenue of $2.14 billion, beating the streets estimates of 45 cents earnings on revenue of $2.08 billion, by a fair margin. eBay stock price gained 3.2% in the regular trading session on February 28, following the strong earnings report, before falling back to sub-$25 levels in the subsequent trading sessions. While the earnings surprise could be a small win, an important question to address is how does the latest earnings update fit into the bigger picture of the revival of growth at eBay.
eBay Growth Is Back
One of the most encouraging facts coming out of the Q1 earnings release was that eBay reported a 4% YoY topline growth which was driven by 34% growth at StubHub. The revival of top line growth could well be the inflection point many investors had hoped for after eBay was hit by the Panda 4 update in late 2014. eBay also reported a 12.8% yoY increase in EPS, an improvement of over +10% and -26% YoY EPS growth reported in the previous 2 quarters, respectively. More importantly, eBay reported encouraging growth numbers across the various segments.
eBay's topline growth was driven by a 34% YoY growth at StubHub and 17% growth in marketing and other services revenues. 'Net transaction revenues' saw a small .5% YoY growth, which was an improvement from sales declines reported in the last 2 quarters
|Net Revenue growth||Q3 2015||Q4 2015||Q1 2016|
|Net Transaction revenues|
|Total Net Transaction revenues||-2.6%||-1.1%||0.5%|
|Marketing services and other revenues|
|Total Marketing services and other revenues||-1.1%||3.9%||17.0%|
Structured Data and SEO Update
As mentioned in our eBay Q1 earnings preview, the structured data discussion occupied a pretty central place in the Q1 2016 eBay earnings call. The latest structured data effort launched in late February now covers 60% of manufactured inventory listings on the platform. This is up from 37% at the end of Q4 2015. The company also made significant process on the data processing and listing enrichment front, adding 16M+ new items and 1.6M+ new product reviews.
eBay also launched capabilities to enable product search using product codes and also moved over to new product browsing modules, which is in-line with how most online shopping platforms list their products. The new listings design is more in line with what buyers are used to and it will also improve product discoverability on the platform, as per the company.
eBay management also reported good progress on the SEO efforts. Quoting from the earnings conference call:
Finally, we're making progress on building new product and search pages which are starting to drive healthy SEO traffic from search engines. While SEO traffic from non-structured data pages continues to decline, we've been able to offset much of that decline by shifting traffic to these new pages which now represent 10% of total SEO traffic with higher overall conversion rates.
An important number for investors to track in the upcoming quarters will the search traffic driven by new product pages, which have incorporated the structured data changes. This will be a major factor in drawing buyers from organic searches (search engines), which should provide a significant boost to eBay's finances. These efforts will also boost the buyer additions, which clocked in at 800K in Q1, good for 4% YoY growth. The management blamed the 1 percentage point drop (Q/Q) in buyer growth on SEO headwinds, which should abate in the coming quarters.
Profitability, Cash Flows And Share Buybacks
Top line growth failed to translate into growth in Non-GAAP EPS, in spite of $1 billion worth of share repurchases being executed through the quarter. This was due to a 240 bps deceleration in operating margins (non-GAAP) due to an increase in costs of revenue, as well as the impact of foreign exchange in standup costs which led to a deleverage of roughly 140 and 100 basis points, respectively.
Free Cash flow for the quarter clocked in at $483 million, good for 19% Y/Y growth, and a free cash flow margin of 23%. Capex came in at 7% of revenue, in-line with earlier management commentary of 7%-9% range. The company retired $850 million worth of debt in FY 2015 and raised a debt round of $2.25 billion in Q1, with an aim to use that for share repurchase and M&A activity. Total debt stood at over $9 billion, in comparison to $6.3 billion shareholders equity and cash and cash equivalents of $10.3 billion. While the debt to equity ratio does appear to be high, with the interest coverage ratio at 26 there should be little problem for eBay to service its current debt. All in all, eBay balance sheet and cash flow metrics appear to be fairly strong coming out of the latest earnings report.
eBay Q2 2016 guidance
eBay management's Q2 guidance is summarized in the table below.
Source: eBay Q1 2016 earnings presentation
eBay has guided to a stronger (than last three quarters) topline as well as EPS growth for Q2, which is further proof of the fact that the current structured data and SEO efforts are taking the company in the right direction. It is only a matter of time before the impact on the financials is more profound.
eBay reported its Q1 2016 earnings last week. The company beat the street's estimates and also made good progress on its SEO and structured data efforts. It is only a matter of time before these changes will reflect in increasing active buyers and improved financials. Long term eBay investors therefore, should keep eBay stock on their radars, given the cheap valuations the stock is currently trading at.