eBay Growth Grinding to a Halt, Q2 In Line, Q3 Guidance Weak

From Silicon Alley Insider, July 16, 2008:

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.

We'll listen in to the earnings call at 5 p.m. Eastern looking for more color, as well as any news about its odd legal fight with Craigslist.

Key Metrics:
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 capitalize 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 fueled 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/A