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A Look Inside The Q1 2018 Earnings Call by eBay

Wednesday’s 2018 Q1 release by eBay has investors worried the company’s long-term growth might be more difficult than anticipated.

Shares in eBay traded down in after-hours trading and the trend continued as the markets opened on Thursday with an over 5 percent hit on the share price.

So what is causing the angst among investors? Here is a quote from Josh Olson, analyst at Edward Jones & Co. as provided to Bloomberg.

“We’re still in this pattern of getting a glimpse of something good one quarter and then a big shrug the next,” said Josh Olson, an analyst at Edward Jones & Co. “Their strategy is right in terms of investing in their data and the technology running the platform, but I question the execution since we’re still in this period of fits and starts.”

And according to the same Bloomberg story, other analysts are concerned about Amazon and Walmart taking over the eCommerce sector while eBay does not seem to be moving fast enough.

Moving to a catalog based marketplace seems to be the key point for many investors for eBay to stay relevant in eCommerce. They also seem to be interested in an accelerated process to get there, not the methodical, but slower, process eBay has chosen.

Ironically, on both counts, eBay is facing some seller backlash as many sellers are not happy with the new catalog based concept.

So this will be interesting to watch if eBay will speed up its strategy, which may mean it could very well introduce more categories and new features at eBay Open 2018.

eBay Q1 – The Numbers

Net Revenue: $2,580 billion (2016: $2,303 billion)
Net Income (Non-GAAP): $548 million (2016: $538 million)
Earnings per Share: $0.53 (2016: $0.47)

Highlights from their Q1 Earnings Call Transcript

Note: GMV is General Merchandise Volume, in other words total gross sales of products sold on the marketplace. This should not be confused with Net Revenue, as Net Revenue means income from fees.

  • Total GMV and revenue were up 7% while active buyers grew 4% to 171 million.
  • GMV and revenue on eBay grew at 7% with U.S. Marketplace GMV growing at 7% while international GMV grew 6%.
  • StubHub platforms grew volume at 13% and Classified platforms grew revenue at 10%.
  • Over the past year, eBay moved the majority of their SEO and paid search traffic to land on new product and browse pages to use their product catalog. They’ve also begun using the catalog to simplify both business and consumer selling, with sellers now being able to save time and money by relying on catalog-level attributes to list and promote their inventory.
  • This quarter, eBay began focusing their efforts on organic traffic, launching a full product-based commerce experience to a subset of buyers in the U.S. Users searching for a number of specific products are now landing directly on a product-based search result. This is an important first step towards moving a material amount of eBay’s GMV to product-driven experiences over time.
  • eBay also scaled the new Authentication and Guaranteed Delivery services they launched in Q4. Conversion on authenticated inventory is twice that of similar non-authenticated inventory, which highlights the importance buyers placed on trust for high value purchases.
  • With Guaranteed Delivery, eBay is seeing increased buyer purchase frequency and high satisfaction scores. And many sellers who are using Guaranteed Delivery are seeing significant increases in sales.
  • In Q2, the brand campaign will evolve to directly address the eBay value proposition, clearly explaining inventory and price advantages and define what makes eBay unique.
  • The company also expanded their first-party advertising program with the launch of Promoted Listings Lite, which is focused on smaller sellers. eBay continues to get significant traction with Promoted Listings where nearly 200,000 sellers advertised 130 million items in the quarter, driving more than 200% year-on-year revenue growth.
  • On implementing the in-house payment system, eBay will launch an employee beta this summer and then incorporate their learnings into an initial market test where they’ll further learn and iterate. The company expect to start small and grow penetration, building towards intermediating up to 5% of GMV in North America this year.
  • StubHub had a good quarter, driven by strong international growth, a record Super Bowl and a strong College Football Playoff performance.
  • Classified platform delivered another quarter of double-digit growth with continued strong performance in eBay Kleinanzeigen (German classifieds) and good growth in emerging markets.
  • In Q1, eBay launched a new Motors offering for dealers in the UK, which combines eBay Motors and Gumtree. They’re also growing eBay listings on Classifieds, which we expect to deliver nearly $200 million of GMV this year.
  • With the acquisition of Giosis Japan, a leading e-commerce platform, combined with eBay’s existing export business, the company will now have a Japanese business that generates over $1 billion of GMV annually with strong double-digit growth and a large market opportunity.
  • In the quarter, trailing 12-month buyer growth was 4% year-over-year, a one-point deceleration versus Q4.
  • In the core eBay platform, the company has seen some pressure on growth over the past couple of quarters from first-time buyers who buy in low ASP tranches. They are actively working to reverse this trend through a number of initiatives, such as the Under $10 micro sites that were launched in Q1.
  • Q1 sales and marketing expense was up 120 basis points, driven by promotional and brand spending. eBay continually manages marketing mix and shift spend between various channels. In Q1, the company spent heavier on buyer-facing promotions that are now reported as sales and marketing expense, while dialing back on seller incentives that are recorded as contra revenue.
  • Product development costs were up 70 basis points as the company continued to invest in product experiences across all of our platforms, including investment in AI and payment intermediation.
  • In response to a question about China ePacket, Scott Schenkel, CFO eBay answered: “…on your question on ePacket, our China export sellers did pretty well in Q1, and I don’t think it really had a material impact. I’d say that the reason it didn’t is we’ve been working over the last several years to really help our Chinese sellers position inventory into markets and warehouses that we’ve coordinated with outsourced providers to provide the capability for fast shipping in country. And so while, clearly, that’s a pressure, I don’t think net-net it had a lot of impact.”
  • Devin Wenig, CEO on Flipkart: “On Flipkart, look, I won’t speculate or comment on what Walmart may or may not do. I’ll just reiterate what our relationship with Flipkart is, which is we made a meaningful investment last year. We have an exclusive commercial relationship that has roughly three years left to run, and that is a relationship that makes us both the exclusive importer and exporter of goods on the Flipkart Marketplace.”
  • Devin Wenig, CEO on GDPR: “On GDPR, we feel like we’re ready for GDPR. We’ve been working on this for quite a while. We have partners in advertising and we’re waiting to see how those partners comply. I think it’s less a matter of compliance and perhaps it’s a matter of what requirements they have or don’t have, and that’s still evolving. But I feel really good about where we are. Our readiness, our regulatory compliance and I know everybody in the industry is watching it, and we’ll watch it very carefully.”
  • Devin Wenig, CEO on big brands: “We’re not particularly focused on big retailers… They get sales from multiple channels that may not be around in a few years and they’re looking at their alternatives, and eBay is one of the very few at-scale marketplaces in the world, and we don’t compete with our sellers… There was a time when eBay was very focused on big retailers. We’re not now. That doesn’t mean that we wouldn’t situationally partner with a big retailer here or there, but we’re not at all dependent on big retailers for our GMV and, quite frankly, it’s not an area of significant focus for us. It is about brands and it’s about our small and medium-sized sellers. That’s always been the engine of our growth.”

Positives with Challenges!

The bottom line eBay is making money and growing. Investors always want more growth and hope for performance breakthroughs.

The company in several questions talked about how their growth is not going to be linear, in simple English, consistent.

There is the one curiosity that has been highlighted before, eBay is actively investing in China and sees growth in Chinese export, but then says they are not competing with their sellers.

In this earnings call, they discussed third-party arrangements with logistics and warehousing for Chinese products to combat the government subsidized ePacket program from China.

What does this mean for the future for sellers? Will this result in increased competition from Chinese sellers on eBay.com, eBay.co.uk, and other marketplaces?

In this call, Wenig downplayed big brands, yet in the Goldman Sachs conference earlier in the year he was a lot more positive about bringing big brands to the platform.

The company also admitted to a slowdown in member growth. One quarter does not indicate a trend, but most sellers would probably agree there has not been as much visible general brand advertising over the last three months as had been seen leading up to Christmas.

eBay’s marketing expenditures in Q1 apparently included a lot of couponing, which indicates they are trying to maintain activity among its current users. But that doesn’t increase member numbers.

That may explain the slowing of new member acquisition and eBay did state they are rolling out new branding initiatives to try to bring more members to the platform. Wenig said to that topic “…we’re disciplined marketers. We are marketing more aggressively, but it hasn’t changed our overall philosophy. We measure marketing really carefully. We don’t buy growth.”

While eBay was defending its current strategy, it is also pretty clear that investors and analysts are a bit concerned about the pace. It will be up to the eBay management team to work through the changes in the platform without alienating sellers and while maintaining investor confidence.

What are your thoughts on the eBay Q1 earnings call? Head over to our Facebook Discussion Group or use the comments section below.

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