eBay’s Q2 was in line with expectations, but Q3 guidance is weak, and will disappoint; shares are down 6% after hours. Sales increased 20% year-over-year, and net income jumped 22%, aided by share buybacks.
More important: Growth in eBay’s “Marketplaces” division — its core auctions/sales business — is grinding to a halt. Transaction revenues grew just 9% year-over-year, vs. 14% y/y growth last quarter and 23% y/y growth during Q2 2007. PayPal and Skype are doing fine.
Revenue: $2.19 billion vs. $2.17 billion consensus, up 20% y/y
EPS: $0.43 vs. $0.41 consensus
Operating Income: $545 million, up 19% y/y
Q3 Revenue Guidance: $2.1-$2.15 billion, short of $2.18 billion consensus
Q3 EPS guidance: $0.39-$0.41, low end of $0.41 consensus
Full-Year Revenue Guidance: $8.8-$9.05 billion vs. $9.01 billion consensus, up from prior guidance of $8.7-$9 billion
Full-Year EPS Guidance: $1.72-$1.77, in line with $1.74 consensus, up from prior guidance of $1.70-$1.75.
Notes from conference call:
5:00: Call starts — standard disclaimers
5:05: CEO John Donahoe: delivered strong financial results. In our marketplaces business we feel good about overall results. Marketplaces revenue grew 13%. We’re seeing encouraging signs from the changes we’re making.
5:06: Our marketing services businesses also performed well led by strong momentum in classified and advertising.
5:06: PayPal revenue was up 33%. Increasing ubiquity of PayPal online. We’re only beginning to tap the potential.
5:07: Skype had its 6th consecutive quarter of positive growth.
5:08: Priorities for 2008: make Ebay easier and safer, weave auctions and buy it now together, continue PayPal’s dominance in online payments both on and off eBay.
5:10: New listings grew 19% in Q2. Selection on eBay is unmatched and it’s getting stronger. We’re seeing early results in our efforts to improve trust and safety. Sellers, both large and small, are making customer satisfaction a competitive advantage on eBay.
5:10: The number of power sellers with Detailed Sales Ratings of 4.8 or above (out of 5) has doubled.
5:12: Everytime you make a change someone’s going to be mad. There are two areas where we’ve recently modified our plans — last week we made changes in feedback, and we backed off our plan to make PayPal the only payment system in Australia.
5:14: PayPal has great growth prospects. PayPal and eBay greatly benefit from each other. Global penetration increased 5% y/y to almost 57% worldwide.
5:15: Seeing dramatic growth in the merchant services side. JetBlue, Blockbuster, and others have started offering PayPal this quarter.
5:16: Skype: revenues grew 51%, on track to pass $500 million in revenues with double-digit profit margin. Free peer-to-peer video is now used in 25% of Skype calls.
5:17: Rajiv Dutta is retiring from head of global marketplaces. He was previously CFO. Lori Norrington is replacing him, she was former CEO of Shopping.com.
5:20: CFO Bob Swan: Size of our business has increased more than 50% in the past two years. We’ve begun to capitalise on new opportunities like classified and advertising. PayPal transactions are now 26% of revenue. Marketing Services is 11% and Skype is 6%.
5:22: Repurchased 566 million eBay shares in Q2.
5:23: Operating Margin came in lower because of focus on lower margin businesses — PayPal and Skype.
5:24: CapEx 6% of revenue for the past four quarters.
5:24: Return on investment capital was 28%
5:25: Growth in marketing services was fuelled by advertising deals and classified businesses. Marketplaces growth was negatively impacted by 3% because of Power Seller discounts, among other things.
5:26: International GMV grew by 4% over last year, excluding foreign exchange.
5:26: One of our key inititaves is to increase selction on the sites. We reduced upfront fees. the pricing changes have had their desired effect on selection. With selection increasing fairly dramatically, we expereinced an expected decline in conversion rates. Sold items growth was 10% of the quarter, a 1% decrease from last quarter. This is largely because Korea and Australia. Average selling price declined by 6% from last year, because of the slowing economy, a campaign in Germany that brought lower priced items onto the site, and a crackdown on fraud.
5:29: PayPal posted a strong quarter. total payment volume was $15 billion, a y/y increase of 35%. We believe the strong growth in PayPal, is a result of our efforts to increase ubiquity of PayPal, increased use both on and off eBay.
5:31: We remain focused on tremendous growth opportunities for PayPal.
5:32: Skype total revenue increase 51% over last year. 338 million total users.
5:33: Product development came in 40 basis points higher than last year. G and A came in 20 points lower than last year. $2.9 billion of the $3.4 billion of eBay’s cash rests outside the U.S.
Q: What do you think is the impact of couponing on eBay’s total revenues? Discounting?
A: We indicated that our marketplaces revenue was impacted by 3 points because of the price changes, higher discounting for power sellers, and coupons to retain buyers as opposed to attracting new ones. We think the power selling discounts is a great program so the power sellers provide a great service.
Q: There’d been discussion about rolling out category specific pricing. In the U.S. you rolled out media, timeline for more categories? What about the deal with Buy.com?
A: Most likely in the second half of the year. Sellers make very different margins in different categories. With respect to Buy.com, that relationship symbolizes what we want to do going forward. To incentivise buyers to provide great service to buyers. Buy.com is doing that. But it’s not just limited to the big sellers. We have many small sellers succeeding under these conditions. We intend to continue to reward that.
Q: GMV growth was lowest we’ve seen in years. What did you bake into your guidance in terms of GMV growth and ASPs? Also what other areas in the economy are you seeing weakness that causes for cautious guidance in Q3?
A: Primary focus is on increasing velocity on the eBay platform. The most important metric for us in the near term is successful item growth. In the quarter we had 11% successful item growth in Q1, 10% in Q2. We feel like we’re making decent progress. But lower ASPs dramatically impacted GMV. The good news that buyers are getting better deals on eBay, but that bad news is we don’t see higher GMVs. The only item in the economy slowing us down is vehicles. 0% growth in the second quarter in vehicles.
A: ASPs have been economy sensitive. Consumers have been migrating to lower-priced items within categories. And we’ll continue to feel that until the economy gets better. This is one of the reasons why we’re going to be increasingly focused on sold items. That’s the best indication that buyers are coming back and they’re buying. We can’t manage ASPs.
Q: We’re not sure how to take the quarter. You’re seeing decent growth in Skype and PayPal but it’s not enough to offset the weakness in Marketplaces. And it doesn’t seem like it’s going to pick up soon. Help us understand how your shares are undervalued at current levels if the Marketplaces business is weak.
A: On the changes to the marketplace, we are about where we expected to be at this stage. We said we’re going to make aggressive changes to make the business more competitive. The movement in pricing drove selection quickly. We’re going to continue to make changes and we think they’ll drive sold items up. The ASP situation will play its way out. Over time revenue will go up. Half way into the year we increased guidance. If we focus on improving velocity we know we’re going to monetise that in new and different ways.
Q: Any noticeable benefit from tax rebate stimulus checks? And any traction from PayPal’s 1.5% cash back program?
A: We saw successful item growth quarter over quarter. It’s hard to isolate down to whether the tax rebate check had a discernable impact but I would say probably not. On the PayPal promotion, too early to say.
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