EBay Inc.'s (EBAY) marketplace and payments division are veering in opposite directions ahead of the planned split into two companies.
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For the first time, quarterly revenue from the PayPal payments division exceeded that from the core marketplace, which essentially makes up the main eBay.com website. And while PayPal is growing, the marketplace business shrank for the first time in more than five years.
Still, investors cheered eBay's quarterly report, which exceeded analysts' estimates on revenue and profits. Shares of the San Jose, Calif., company jumped about 5% in after-hours trading to $59.60.
The report is one of eBay's final indications of financial performance before the company divides into two independently traded companies in this year's second half. EBay has said the split will give both units greater flexibility to focus on strategy relevant to their core mission.
"It's the story of two companies and that despite the emergence of new competitors to PayPal, it still has a valuable place in the world of digital commerce," said R.J. Hottovy, a Morningstar analyst. "And it's still evident that the marketplace business is trying to find its way."
Marketplace revenue--which besides eBay.com includes sales from sites such as online ticket reseller StubHub--dropped 4% to $2.07 billion, while PayPal's revenue grew 14% to $2.11 billion.
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That is the first time PayPal has come out on top by that metric since it was acquired by eBay nearly 13 years ago. It is also the first decline in sales for eBay's marketplace since the third quarter of 2009.
The company didn't specify in its earnings report why marketplace revenue fell. Executives are speaking now on a conference call with analysts.
Overall, eBay's sales rose 4% to $4.45 billion and the company swung to a profit of $626 million, or 51 cents per share, from a loss of $2.33 billion, or $1.82 per share, a year earlier when eBay took a one-time tax charge.
The resulting 77-cent profit, excluding some items, exceeded analysts' expectations of 70 cents per share; and eBay also bested the forecast of a $4.2 billion in sales.
EBay's marketplace unit faces a tough road ahead as a stand-alone company, particularly without the reliable infusion of cash from PayPal. Amazon.com Inc. has been eating into the company's market share by bulking up its third-party sales, and new competitors such as Jet.com Inc. could pose a challenge by drawing cost-conscious Web consumers.
Meanwhile, competitive threats to PayPal, such as Apple Inc.'s Apple Pay and startups like Square Inc., haven't seemed to dent PayPal's lead in digital payments.
PayPal boosted its active user rolls by 2% from the fourth quarter to 165.2 million while the marketplace division increased its accounts by 1% to 157.3 million.
This month eBay said that despite the split, both the marketplace unit and PayPal will be reliant on one another for at least five years. EBay has agreed to ensure that about 80% of gross merchandise sales on eBay.com be routed through PayPal or it will face cash penalties. PayPal, meanwhile, will have to pay its former parent if it facilitates much more than 80% of sales.
As part of that operating agreement, eBay can seek out other payments providers for its sites, while PayPal can offer its services to other e-commerce players.
EBay cut about 2,400 jobs in anticipation of the split and said it is seeking a buyer for its eBay Enterprise unit, which helps other firms with their e-commerce strategy. That division reported a 7% jump in sales to $288 million in the first quarter. EBay didn't provide an update on its effort to sell the unit.
(By Greg Bensinger)