Wednesday, October 17, 2007

Riddle Me This eBay!

All right, I'll give you my quick blush analysis of eBay's 3rd quarter results and raise some questions I have. Now, I am not a financial guru and I welcome feedback from my readers and please tell me if I am way off base here. eBay reported great numbers but when you break it down they appear to have some substantial problems in their marketplace business, even greater than I had thought. See page 9 of the 3rd Quarter Earnings Report

  • Registered Users increased by 6.6 million users from the 2nd Quarter to the 3rd Quarter of 07' but Active users actually declined by 300, 000, for what appears to be the first time in company history. Active users are defined as users who have bid, bought or listed an item on the site in the previous 12 months. Is this a sign of a healthy marketplace business?

  • eBay Stores reached a high of 649,000 stores/shops worldwide in the second quarter of o7' but dropped more than 20% in the 3rd Quarter to 520,000 that is also a 9% drop Y/Y. This is not store listings mind you this is actual store closings. A 20% drop in store closings from one quarter to the next should send shockwaves through the financial community. eBay Stores are not for casual sellers. Storeowners are committed to the site for at least 30 days with each item listed. To see a drop of 20% from one quarter to the next should send off alarms. Where are these 129,000 sellers going? Update: As some of my readers have pointed out and Ina Steiner posted today, eBay is not including the China Stores numbers. Ina reports that US Stores held steady from Quarter to Quarter so the decline was in International stores. I have no idea how many were from China.

  • GMV growth in 2007 is flat and it appears the only thing keeping eBay from seeing a GMV decline is the stellar growth of StubHub. If you exclude the GMV from StubHub you will see the true state of the eBay Marketplace business. StubHub was a great acquisition but its success is masking even greater problems within eBay Marketplaces (in the US).
    Core listings are down 3% Y/Y, this after eBay raised fees in stores last August to re-balance the marketplace. Instead what we've seen is a decline in CORE listings as well as a huge number of store closings.

  • Sellers are leaving eBay in droves (at least 129,000 of those 300,000 active users who disengaged were sellers) and management is able to mask the exodus with benefits from FX (foreign exchange), one time tax breaks, increases in Non-GMV revenue and stellar results from StubHub. Sure the company as a whole is doing well but when you start to peel away the layers of the US Marketplace numbers the CORE smells rotten.

I'm just a blogger asking these questions. Why aren’t investors asking these same questions? How long will eBay be able to mask the decline of the Marketplace business? This is very serious and speaks to why there seems to be a disconnect between what sellers are seeing in their own operations and what eBay is telling investors.

Just my 5 Cents! What am I missing here?


Randy Smythe said...

It is possible that the decrease in active users had something to do with the T&S crackdown in July and August. That could also explain the reduction in Stores.

That's a lot of users to kick off the site. If that was truly the case.

ONLYEBAY said...

Hi Randy,

Some interesting questions. Let me give you one alternative viewpoint (not necessarily right but good for debate).

Active users are up 4% year over year, which given the turbulence of the past 12 months, is decent. The important thing is that EBAY is keeping its valuable users and letting them transact more while finding ways to clean the site of fraudulent or low-value users.

The drop in EBAY stores this quarter is larger than I would have guessed (I had not noticed until you pointed it out). But given recent data on store listings, I don't see this being an issue. Again, it is the low-value added stores that are being encouraged out. Remember store listings have just this week started rising year over year.

I'm not sure your GMV comment is correct. Even without StubHub!, it seems to me GMV grew at double-digits year over year as a result of better conversions, higher ASPs, and positive FX effect. Am I misreading?

With regards to your final point, I think management have been relatively explicit in breaking out FX benefits, tax benefits, and the stubhub acquisition. If they were trying to mask something, you would find all these lumped together (and trust me, many companies do).

And finally, investors are starting to realize that PayPal on its own is worth just as much, or even more, than EBAY. With 61% growth in merchant services, it is beginning to be less important whether Marketplaces is growing a little faster or a little slower.

Randy Smythe said...

Thanks for your comments. I agree that the company as a whole is doing well but I still beleive the marketplace business is struggling more than eBay is letting on.

Maybe investors are not concerned with this as long as all the number shake-out. I know that eBay sellers are still very concerened with this.

I think the latest fee promotion is a sign that eBay's other levers have not worked and this is a last ditch effort to reinvigorate CORE. eBay call it a test and I call it a Hail Mary!

ONLYEBAY said...

I agree that a fee decrease for EBAY sounds a little desperate. But competition is heting up. Amazon, Google Products and just about every major retailer has stepped up their online presence.

EBAY could raise prices in the past because they were a quasi-monopoly. Maybe they realize that in order to keep growing, they need to become competitive (gasp!).

I hope somebody catches ths Hail Mary. (reminds my of shop victiriouslt ad)

Anonymous said...

The report showed this is the first quarter where they stopped including eBay China in their count for number of stores, so that would account for some of the drop in stores. I have no idea how much though

Randy Smythe said...

Sellers have been complaining about economics for years so you would think this promo would play right into their hands.

But, they are beat down right now. The ROI on an eBay business even with a fee cut is nowhere near what it used to be.

Amazon takes close to 20% of each transaction and you don't see them discounting. When the cost is all on the backend (FVF) sellers can adjust pricing to compensate. With listing fees, some months eBay takes 17% and some months they take 25% or more.

I complain because I see tremendous upside to the Marketplace business if eBay would make the right changes.

Look at eBay's guidance for 08,' oops there wasn't any guidance. They are saying that margins may be depressed because of R&D etc. in their "Low Margin" business, (BTW who in their right mind calls 25% low margin?)

They've already milked the cash cow. In order to grow they have to spend and margins have to be depressed, read over the question and answer section of the Earnings transcript. They don’t have a clue what to expect in the future. Would you want to be heavily invested in a stock where that was the case?

Anonymous said...

Howdy! eBay PowerSeller here.

There were a few eBay policy changes which probably contributed to the store closures in 2Q 2007.

* First, eBay introduced "Feedback 2.0", which included Detailed Seller Ratings (Those star thingies), and also plastered the title of the listing and price paid onto seller feedback, and the title of the item purchased on the buyer's feedback.

A lot of stuff sold on eBay is "brown paper wrapper" type stuff, and a lot of people don't relish that kind of transparency. I would note that eBay has scrapped the practice of listing the item title on the buyer's feedback page.

* Second, eBay started cracking down on "bad guy" sellers. Anyone with 5% neg/neutral feedback in the past 90 days can get their account "restricted" or even flat-out suspended.

* Additionally, there have been some fairly draconian VeRO crackdowns, where certain sellers of brand-name merchandise have been running into all kinds of nightmares.

Right now, eBay has instituted a new search engine "improvement" which looks good on paper, but is a nightmare in real life. If you sort by price, the price now includes postage. The problem is, not everyone lists postage and so their items show up in the back of the search.

I would imagine that they might eventually tweak some more, so that people can turn off this marvelous feature, if they don't scrap it entirely.

Randy Smythe said...

OnlyeBay, here is the data on the Subhub and US GMV from Jeetil Patel at Deutsche Bank.

US GMV was 6.7bn ans essentially flat from the last quarter and grew a modest 10% Y/Y (7% w/o Stubhub).

That seems to me to be masking something when StubHub accounts for 3% of that growth.

ONLYEBAY said...

I see your point.

But limiting yourself to US GMV is misleading if you consider international GMV has been a majority of EBAY's GMV for 2 years now.

If you include international GMV which grew at 17% Y/Y this quarter, then you still have double-digit growth in GMV even without Stubhub!

Randy Smythe said...

The .com is the flagship marketplace business for the company and excluding StubHub it grew just 7%. This identifies a huge problem in my mind.

I'm just trying to point out the problems with the US market are more severe than most investors think.

How much of that 7% growth was and Express?

ONLYEBAY said...

So the least performing geography (US) of the least performing segment (GMV) of the least performing business unit (Marketplaces) is 'just' growing at 7%. If only all my investments had these characteristics.

Randy Smythe said...

"So the least performing geography (US) of the least performing segment (GMV) of the least performing business unit (Marketplaces) is 'just' growing at 7%. If only all my investments had these characteristics."

:) I know it sounds kind of silly doesn't it. But I think they are missing out on much more growth.

Randy Smythe said...

One more thing I neglected to mention in my post above. eBay US grew 7% (excluding StubHub) and as an investment that is certainly better than a Money Market but to see the impact of that slow growth on sellers just divide the $460 million GMV increase over 500,000 US sellers. That is a whopping $920 GMV increase per seller for 1 full quarter and they still have eBay's 17%, PayPal's 3.5%, COG, Postage, NPB's, Returns, Direct Labor and overhead to take out of that $920.

And since eBay's marketplace business has been flat for the whole year the majority of sellers are not seeing any growth at all.

Is it any wonder they are upset and leaving for Amazon or their own websites.

permacrisis said...

The slow and steady drop is no fault of ebays, but the sudden Q3 plummet is 100% attributable to Finding 2.0... sellers who sell unique or one-offs do not appear in ebay's new search. Rumor has it the engine behind this search is recent acquisition StumbleUpon's Relevance Engine but as yet no proof... Doesn't matter, sellers of antiques and collectables are pulling up tent stakes in response to this final slap in the face. Glib, butt-chinned businessmen in $500 shoes( )have no idea how the ebay system works, and are ruining the loyal base of unique item sellers, without which there would be no ebay. ...meanwhile, chinese drop shippers registered in Ohio continue to hock cookie-cutter wares (same as you can buy anywhere) and counterfeit ipods all the day long. But try 'finding' a certain stamp, antique, postcard, or other collectible anymore. With the new search, you cannot. Core will never recover. Ebay will be ebay in name only.

Anonymous said...

When stores were first created Meg embraced us. Then one morning she woke up, decided she hated us and devised a plan to get rid of us. So she raised our fees, took us out of searches, took away our gallery pics, and replaced our keyword advertising (featured stores) with a ton of outside advertising sends buyers OFF ebay.

Now Meg has discovered she needs stores but do we need her? NO! It took Meg 2 years to admit she paid too much for Skype and store owners don't have 2 years to wait for Meg to finally admit ebay's patent on Finding 2.0 doesn't work. Meg also needs to decide whether ebay is an auction site, a social network for the myspace kids aged 12 to 15, or a search engine for advertising.

Meg better make up her mind quick before the last store owner leaves and turns off the lights.