eBay (NASDAQ: EBAY) announced earnings for the first quarter of 2016 on Tuesday, April 26. Revenue growth has been under pressure over the past several quarters, and it looks like this will remain the case in the middle term. Management is, however, doing a sound job of boosting profitability.
The top line
The company is working on multiple initiatives to accelerate growth. eBay is demanding more structured product information from sellers, building better product catalogs to improve discoverability, and providing more powerful data analysis tools for sellers to offer the right merchandise at the correct price. While these initiatives have good intentions, growth in the marketplace business remains unimpressive.
eBay ended the first quarter of 2016 with 162 million active buyers, a 4% increase versus the same quarter in the prior year. Total gross merchandise volume (GMV) amounted to $20.5 billion during the period, a modest 1% increase but a more encouraging 5% jump on a constant currency basis.
eBay's online ticketing service, StubHub, represents a relatively small share of the business, but it's growing at an impressive speed: StubHub processed $869 million in GMV last quarter, a strong 29% increase.
Total revenue for eBay was $2.14 billion, a 4% increase in U.S. dollars and a 6% growth on a constant currency basis. Revenue from the marketplace business was $1.5 billion, accounting for 70% of total sales, and declining by 2% versus the first quarter in 2015. StubHub produced $177 million in sales last quarter, or 8% of total revenue. Sales in this division grew by a strong 34% annually. Revenue from marketing and other services was $460 million, representing 22% of sales and growing by a vigorous 17% year over year.
The marketplace business produces the lion's share of revenue, so eBay needs to jump-start performance in this key division if it's going to accelerate total revenue growth in the medium term. Nevertheless, businesses such as StubHub and marketing services should account for an increasing percentage of overall revenue over time, which could have positive implications on overall sales growth going forward.
Earnings and cash flows
Even if eBay is working on improving the user experience, management is also running a tight ship and keeping costs under control. The result of this is expanding profit margins, so earnings per share is growing at a faster rate than sales.
Operating margin was 28.7% of revenue last quarter, a considerable increase from 25.7% in the same period last year. When excluding stock-based compensation and other expenses, eBay retained a huge 33.4% of sales as non-GAAP adjusted operating margin during the period.
After all is said and done, earnings per share from continuing operations was $0.42, a healthy 13.5% increase from $0.37 per share in the first quarter of 2015.
Devin Wenig, president and CEO, sounded pleased with the company's performance during the quarter and is also confident of eBay's initiatives to accelerate growth through an improved customer experience.
In his own words:
Q1 represents another quarter of solid results, as we continue to position eBay for long-term success. ... We are executing our plan and making progress on our strategic priorities to ensure our buyers have the best choice of products and a simple, personalized shopping experience, while sellers benefit from our powerful selling platform.
On the other hand, guidance for both the coming quarter and the full year 2016 is still quite modest. Management expects revenue during the second quarter to be between $2.14 billion and $2.19 billion, representing a constant currency increase of 4% to 6% year over year. For the full year of 2016, the company forecasts revenue to be between $8.6 billion and $8.8 billion, a 3% to 5% increase in constant currency terms versus 2015 levels.
eBay delivered solid profitability during the first quarter, and areas such as StubHub and marketing services are showing promising potential. However, everything indicates that revenue growth will remain in the low to mid-single digits over the coming quarters, as it will take some time for eBay to translate operational improvements into accelerating sales growth.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of and recommends eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.