eBay’s nominal revenue growth remained flat with Q2 at 30%, just ahead of consensus ($1.89 billion vs. $1.83 billion consensus). Importantly, however, acquisitions and currency conversion provided a major tailwind: organic growth was only 23%. Operating margin declined another point to 31%, primarily as a result of mix shift–a greater percentage of revenue from lower-margin Skype and PayPal.
Key segment highlights:
- Marketplace revenue growth stable from Q2 at 27% and $1.32 billion. GMS growth up to 14% year over year from 12% in q2.
- PayPal accelerated again–to 35% in Q3 from 34% in Q2 and 31% in Q1. Paypal is now almost a $2 billion run-rate business ($470 million in Q3), and is almost a third as large as eBay’s core business.
- Skype decelerated modestly but still posted year-over-year growth of 96% ($98 million), down from 103% in Q2. Skype was profitable for the third consecutive quarter and is now a $400 million business.
eBay’s renewed focus on its core marketplace business is modestly reinvigorating growth. PayPal continues to crush the numbers, especially internationally. Skype continues to decelerate and remains a silly business for eBay to own, but is far from a disaster. eBay could probably sell Skype to Yahoo, Microsoft, or Google for 10X revenue, or $4 billion (and should).
Free Cash Flow grew an impressive 32% year over year to $510 million ($2 billion run-rate), driven in part by strong growth of operating cash flow and to a lesser extent by reduced CAPEX. This growth is encouraging, especially in light of the margin deterioration.
Outlook. Guidance for Q4 suggests that revenue will decelerate modestly from Q3. Looking out into 2008, the company noted that it will face “operating margin headwinds,” as it invests more in Skype and other businesses. Neither of these factors–decelerating revenue and operating margin declines–are likely to lead to multiple expansion. That said, at $40, eBay has a market capitalisation of about $55 billion, and trades at a reasonable 25X-30X run-rate free cash flow.
Disclosure: Henry Blodget has a long-term holding in eBay.