EBay's Soft Q2 Guidance Expected, Momentum Remains Clear

Reviewing eBay Inc EBAY's first-quarter results, Benchmark said the below-par second-quarter guidance, both on top and bottom line, was expected, with the company confirming the results would be back-end loaded in 2017.

Although conceding that the timing shift introduces some incremental risk for the year, the firm said it is encouraged by the clear momentum driven by the structured data initiative and user/seller interface overhauls.

Dissecting The Q1 Print

Analyst Daniel Kurnos noted the eBay's first-quarter results were predominantly in line, with strength in Marketing Services and Other, or MSO, offsetting a slightly shortfall in transaction revenues. Among other metrics:

• Gross Merchandise Value rose 25 percent year-over-year to $20.95 billion, below the consensus estimate of $21.06 billion.
• International business came in $50 million short of Benchmark's estimate.
• Domestic business, excluding StubHub, outperformed by $33 million.
• StubHub was $14 million below the firm's forecast despite 300 basis point growth coming from the Ticketbis acquisition.
• Net transaction revenue was $10 million short of the consensus estimate.
• MS&O rose 6 percent, helped by an unexpected 7 percent growth in Classified, leading to a $12 million revenue outperformance versus the Street.
• Higher costs led to a $14 million mission on EBITDA.
• Lower tax rate and $350 million share repurchases resulted in a 1 cent upside in earnings per share.

Forward Guidance

"The light 2Q17 guide is more likely to be the focal point given the seeming traction with structured data — now 7 percent of total traffic and 16 percent of SEO traffic," Benchmark said of the guidance.

"The additions of product reviews, top rated products and a new home page, coupled with the new stable of B2C tools (C2C soon forthcoming) has given management confidence in pushing the advertising pace earlier than anticipated."

While acknowledging the higher risk to its model for the rest of the year, the firm said it thinks the increased thrust on advertising would help achieve accelerated brand acquisition, enhancing the improving value proposition.

Maintaining Estimates

Benchmark maintained its 2017 and 2018 estimates unchanged, even as it shifted more costs into the second quarter from the second half of 2017. The firm estimates 2017 revenues of $9.43 billion, up 5 percent year-over-year, and earnings of $2.02 per share.

"The shift from paid search to structured data by the end of 2Q could also be a source of longer-tailed upside, but given the relatively early nature of the investment process and ongoing testing, we believe a more cautious stance is prudent over the next 6–18 months with regards to results" the firm concluded.

Benchmark has a Buy rating and a $39 price target for the shares of eBay.

At the time of writing, eBay shares were down 2.88 percent in pre-market trading.

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