Wall Street Divided Over eBay's Q4 results

In the last week as the dust has settled on Q4, an interesting divide has started to become apparent amongst the Wall St. analysts that follow eBay. I spent some time this weekend reading most of the preview reports and it seems the main area where the firms differ in their viewpoint is not on the listing counts which they all admit were not as robust as they hoped (anywhere from 5-15% below expectations), but in the revenue generated from those listings.

The mid-point of eBay's transaction revenue guidance is $1.052b and this is the part Wall St. is watching very closely.  Of course the performance of PayPal and Skype will play a factor, but all eyes are on the core business and it's corresponding revenue.

This is oddly similar to the 2004 Q4 season when signs of eBay's slowing first came to light when Q4 results failed to delight and the company's stock was hit very hard and hasn't really recovered since.  Given the significance of that historical data point, I thought it would be useful to readers to dig into this because as a seller, you have "hitched your wagon" to the eBay star, so understanding how the financial world looks at the company can be important.

The Bulls would argue that while the listings were a little light, due to improved conversions and ASPs, eBay's revenue/listing will be significantly higher thus making up for any gap from listing revenues and potentially generating net positive results ahead of expectations.

Bears don't see it that way. they argue that in order to cover the listings miss, eBay needs to have increased revenue/listing 5-10%.  Revenue per listing has been trending down since Q104 so this seems unlikely.

In the Bull camp, you have a sampling:

• Justin Post (Merrill) - BUY - listings good, $20-30m upside
• Bob Peck (Bear Stearns) - Outperform - $33 price target - Listings at 646m met target.
• Imran Kahn (JP Morgan) - overweight - Listings targets were met.

In the Bear camp, you have:

• Jeetil Patel (DB) - HOLD - $29 target - 640m listings in Q4, represents 10% y/y core growth.  GMV growth at 14% y/y for the Q is below the 18% they wanted to see.  The UK has slowed and DE is not growing at all.
• Safa Rashtchy (Piper Jaffray) - Under perform - $25 target.  Listings 10% below expectations, 07/08 too aggressive, need to come down. Q4 revenue miss of $33-53m possible.

I have to admit to being somewhere in the middle.  Amongst eBay's largest sellers, this was a great holiday season.  We definitely saw a stronger y/y listing increase than the aggregate numbers are showing and that was due to definitely increased conversions during Q4.  On ASPS, we saw an increase there, but it's due to the mix of goods sold not due to consumers willing to pay more.  This is an important distinction.  It's assumed when someone says that ASPs on eBay are up, that sellers+Wall St. frequently view this as an indication that buyers are willing to may for goods.  That's not the case and as long as I've been following eBay, prices have been on the decline for like goods year over year.  So when ASPs are going up, what we see happening is a mix shift of goods.  For example, if you have 50% of GMV from the video game ($20 ASP) and 50% GMV from the golf category ($120 ASP), and that switches to 25%/75%, the ASP will move up significantly.  This mix change happens within the total ebay world at a Macro level and even at a micro-level (the individual seller level).  We frequently see sellers abandon lower price items because the amount of work and small margins on a < $20 item are no longer worth the hassle on eBay.  Thus those sellers tend to only put on eBay items over $20. This moves the ASP up, but it's not necessarily a positive for eBay because the selection of the good < $20 items has been degraded.

In any case, I think eBay still has a tough road ahead.  In 07 it will become apparent that eBay Express isn't solving any problems, Skype is not going to be generating high-margin dollars any day soon, Europe is slowing and Asia is pretty much done.  eBay has two places to turn for growth: core US/Europe and acquisitions.  I don't think the markets would look favorably on another big acquisition (e.g. facebook for $Xb), so that leaves really one option.  A healthy eBay core is good for the entire market so I'm actually viewing that eBay is being somewhat forced to address core's issues as a long-term positive.  The biggest risks are:

a. Is it fixable?
b. Can it be fixed quickly
c. Will eBay make the hard decisions that it takes to fix core?

We'll know the answer to the Q4 question on Jan 24th when eBay reports.

What do you think eBay Strategies' readers - will eBay come out of Q4 with a 20-50m beat on revenue or 20-50m miss?  Are the core issues fixable and will eBay do what it takes to make the changes?  This is your time to make your 2007 predictions.

Note: Due to the high rate of comment spam, I had to turn on comment approval, it may take 24-48hrs for your comment to appear now, but I will get to it and only filter out irrelevant spam.

Comments

[Carl]

I find it interesting that Mr. Cobb points out that a very large potential audience is looking for conveniance in purchasing. In addressing how to penetrate this group Mr. Cobb focuses on seller advertising strategies with one emphasis being "CORE BIN".

It seems that whatever the perceived warts of the short interlude of SIS the one overiding effect was a substantial increase in those conveniance sales.

It is interesting to note that eBAY identifies a huge market and then turns their back on a possibly proven methodology of tapping into it.

Might IT beg the question --- How can eBAY better combine searchable stores within a vibrantly magical marketplace. ??

Carl

[Kevin]

The real core problem at ebay is not all the internal fighting that goes on between ebay and their sellers - which I am sure is a serious issue; it is the complexity of the whole process. The site is confusing, unorganized in a hodge podge kind of way and and lacks directness. It reflects the hippie mindset of the founder. If I were in charge I would do the following:

1. Address very seriously the discontent of the sellers
2. Remove the perception of arrogance that ebay management seems to project - it only breeds hatred by former sellers and thus negative street talk.
3. MOST IMPORTANTLY - Redo the whole site top to bottom - it needs to get rid of its "made in the basement on the fly" feel and have an elegant, professional, intuitive, simplicity like itunes and Apple (and I am not an Apple fan). This is the biggest issue keeping ebay from growing -- the whole proicess from being a buyer to a seller is a major head ache. Because ebay has been a near monopoly in the past; it got away with running like the DMV. But with compititon now -- if they don't get more customer friendly (both buyers and sellers are costumers) they are dead. I hope not - I like ebay, but is is absolutely dead with out a culture shift and a major simplification of the site.

[Tony P.]

Scott, you left out one more avenue in which ebay can increase revenue. It isn't actual Growth, so to speak, but neither is revenue that's derived from simply raising Fees. I am speaking of their whoring-out with the Yahoo Banner Ads.

As to what amount those Ads actually add to the coffers, is anyone's guess. Maybe it's enough for them to finally be placed into the actual Listing Pages. Yeah, I know that Mr. Cobb emphatically stated that such a thing would never occur, but who here would be totally shocked by such an action? The ebay UA already states that even that piece of 'real estate' isn't out of bounds for anything that ebay wants to place upon them.

Besides, Mr. Cobb (et al) has been known to back-peddle upon a promise, or to simply ignore any questions concerning a past promise. Examples...

1. ebay Keyword Program was to benefit from the relationship with Yahoo. It benefited, if ADIOS is a benefit. (May 25, 2006 - Bill Cobb Announcement)
2. SIS was to return, albeit in a different fashion, if necessary. (April Town Hall, 2006 - Gary Briggs answer to Question #16)
3. No Yahoo Ads if search returns more than ZERO listings. If ONLY Store listing(s) show, then Yahoo Ads still appear. (numerous Bill Cobb statements
4. He cares about the sellers.

[Dr. A]

I have studied Googles track record in launching new services and products. IT's NOT VERY SUCCESSFUL. Every time a new product is launch the media jumps and hails its the category killer and then it dies after month.

PayPal is nearly International while Google Checkout is US only

[Dr. A]

I want to state that I have items on Ebay and Craiglist and other site and I am having problem selling them. I don't really think it Ebay fault. The US market is not doing well overall.

Clearly, the No. 1 competitor to EBay is Google. EBAY IS LIKE A DUCK...THEY SHOULD START TO ATTACK. GOOGLE is a search engine, but now it want to move into e-commerce.
The business case is compelling. Not only would this be a major new market for Google (at the expense of eBay and Amazon.com), but also it would be an excellent strategic move against Yahoo (Yahoo! Shopping) and MSN (MSN Shopping).

Google already has a shopping search engine, Froogle.
Ebay has it's own shopping search engine -Shopping

Google has a payment plan-Google CheckOut
Ebay has it own= PAYPAl

Google has Google base
Ebay has 25% of Craiglist and Kijiji

HELLO EBAY WAKE UP AND START ATTACKING. THIS IS WHAT I WOULD DO:

1-address concerns about fraudulent sellers which you are did today with doubling to $2,000 the amount it guarantees will be refunded for items not delivered or are damaged upon delivery

2-beef up shopping.com

3-Lower rate on PayPal...compete against checkout

4-Allow Kijiji to be used in the US. So far it only for out of US. This will compete against Google base and Craiglist.

5-LOWER YOUR RATES...

6-Since Google is a search engine and now want to be in commerce....Ebay you need to join force with Yahoo to be your own search engine.

[BILLSTUFF]

I would be interested in what you are defining as the eBay core issues in need of attention. I think there are many issues, including fees and the downgrading of eBay Stores, that I would like eBay to reconsider. We have over 10,000 (mostly media) items in two eBay Stores and eBay will be loosing much of our business as soon as we make an immiment changeover to sell from our own web site. This is a direct response to fees and SIS changes. Maybe they just don't want or need the kind of business I represent. That would be a good thing to know, and quite frankly I'm not sure if eBay is leaving sellers like me in the dust, or if a U-Turn in their thinking is remotely possible.

[Steve]

There's another factor this year: competition. For the first time, eBay's PayPal faces some real competition from Google Checkout and web 2.0 sites are popping up that make more appealing listings and integrate with multiple sites (e.g. vFlyer). eBay sellers are not loyal because eBay consistently raises fees and appears to do nothing to combat spam and fraud. Sellers would jump ship if they were not locked in with the eBay de facto monopoly.

I think you will see some effects from competition this year, mostly Google. If they don't calculate that into expectations, then I'm bearish as well.