eBay's Q3 and what it means for sellers - I of II

Yesterday, I put together some first impressions of the results, and today I was able to scan most of the analyst reports and of course listened to the conference call. 

Today, I wanted to highlight some of the macro financial aspects of the call and then go through what eBay's Q3 results and Q4 outlook mean for sellers as that's what this blog is all about.

Summary of analyst thoughts

In general, the Q3 results were a non-event because they were largely known. Thus the big event was eBay's significant lowering of their Q4 outlook which caused analysts to also drastically cut their 09 views as well.  Most analysts I follow took down their 09 revenue significantly $800-$1b and gave EPS a big haircut.  The Q4 outlook represents flat Q/Q and essentially down y/y which has everyone freaked out.  eBay showed some scary looking charts that show a continued deceleration (ecommerce and eBay metrics) going into Q4 here: (click to zoom in)

First the upper right graph is the comscore ecommerce data (eBay doesn't say if it's ex-travel or not, I assume it is - conveniently there are no labels).  Comscore's August number was 6% - down from 10% in July.  I've marked that 6% - remember that number, it will come back up in the metrics of interest section.  Next, I drew a red line around early August in the eBay data that shows how things really started to decline for eBay.  Interestingly, at ChannelAdvisor we didn't see that slowdown, but did see it right around 9/15 when FP30 was released.  That bottom right chart has Wall St. freaked out right now because it is down and to the right, meaning the Q got worse so Q4 will start out at that very low data point.

Here's a brief summary of Analyst reactions:

• Brian Pitz@BofA - kept a buy on eBay and speculates that the eBay problems are macro and not eBay specific (he lowered Amzn, GSIC and goog revenues to reflect eBay trend)
• Justin Post@ML - speculates that eBay's problems are Amazon's gains: "

  also losing share Given magnitude of eBay's 3Q GMV miss ($14.3bn vs $14.9bn expected) and weaker 4Q guidance, results have a negative read-across for AMZN and GOOG.  However, eBay sellers as well as private and public eCommerce companies have indicated more deterioration on eBay than other channels and off-eBay PayPal volumes beat our estimate by $260mn.  We are incrementally more cautious on sector, but believe some of eBay's 3Q $640mn GMV miss likely moved to AMZN. 

• Scott Devitt@Stifel - heroically kept a buy on eBay, and focused in on the value of the future cash flows which make the stock appear cheap from that perspective.  He seems to recommend eBay acquire gmarket.
• Christa Quarles (who is no longer sober - ha!) tied with James Mitchell for the funniest title: "eBay: Lump of coal for the Holidays."  
• Imran@JPMorgan who has been bullish and is all about listings finally broke his bullishness: "eBay: Fall of a Franchise" and downgraded to Nuetral.  Imran believes margins are going to fall considerably and thus anemic operating income will result.  Imran focuses in on the various MP metrics and believes that eBay's user experience is not improved and if anything worsened.
• Meeker/Joseph@MS have an interesting 'sum of the parts' analysis summarized here: "Our sum-of-the-parts analysis values eBay at $26 per share. If we peg the valuation of PayPal at $7.13 per share, Skype at $2.09, Marketing Services at $4.08, and cash at $2.77, eBay share’s current price of $15 would imply the market is not assigning any value to eBay’s core marketplace"
• Ben@UBS points out that this is eBay's first negative growth GMV Q and like Justin@ML highlights increasing competition from AMZN.  He's also concerned with some of the slow-down at Paypal.
• Colin@Lazard focused on the macro economic 'rockiness' and took down not only eBay, but Amazon, GSIC and DRIV
• James Mitchell@GS tied Christa when noted that eBay sees: "No Christmas".  James believes that the companies problems are largely self-inflicted and while not helped by the macro, certainly the macro is increasingly exposing them.
• Jeetil@DB who was bearish, is vindicated by Q3 and lowered his PT to a paltry $13 from $16.  Jeetil feels eBay should sell Skype and use this opp to invest in the eBay core (I concur on this one - let's put 1000 devs on finding - NOW).
• Mark@Citi cites managements execution as one of the major problems at eBay and worries that the model is just fundamentally broken: "Execution -- fee/rule marketplace changes have been highly disruptive & arguably poorly implemented; & 3) Structural - Decreasingly desirable Auction format & an infrastructure-less business model arguably ill-equipped to match rising consumer requirements."
• Derek Brown@Cantor actually took this opportunity to leave grizzly territory for plain ole bear and has moved eBay to a hold from a 'sell'.   He notes this is the first time ever that eBay has had to essentially lower guidance and thinks it's a big step towards recovery.  Derek lowered 09 revs by a substantial 1.3b (biggest I saw).
• Marianne@SIG - Likes the stock here as a value play noting that it is at 9x revised EPS. She speculates that eBay could start a dividend (5%) so you should play the stock that way.
• Jim@cowen - Kept a neutral on the stock.
  

   

Jeetil had a really good graph I wanted to show everyone as it's relative to the seller impact of the Q:

 

This graph hones in what eBay has been calling a more important metric than GMV - transaction volumes.  What Jeetil notes is that Q3 started a material y/y deceleration that he believes will go negative in Q4 based on backing into the number from the lowered guidance.  Of course if transactions go down 7% y/y AND they are lower ASP, then GMV will get amplified down y/y substantially.

What's Macro and what's Execution/eBay?

The really big question coming out of the eBay call and subsequent analysts notes which we'll have some insight from the Goog+Amzn results is: "Is this slowdown specific or worse on eBay, or being felt everywhere in ecommerce/inet?".  I have some data to throw in the pot later on this point.

That's part I, part II coming later with an analysis for sellers and some Q4 action items.  I also owe some FP30 insights we've learned and I'll do that this weekend as well.

Seekingalpha - I am (painfully) long eBay and (thankfully) long Google.

Comments

[deanpeak]

OK its Oct 31. A good day to give us the scary part II of eBay's Q3 and what it means for sellers - I of II?

[DP]

Come on, Scot, where is part II?

You wrote:
"That's part I, part II coming later with an analysis for sellers and some Q4 action items. I also owe some FP30 insights we've learned and I'll do that this weekend as well."

Yeah, well, you still owe it. For that matter, isn't the analysis for sellers what the majority of people really want to read, rather than the fiscal-porn that justifies why you're long? The void is palpable ...

[aikanae]

I agree with Patricia (above). Ebay should be doing better than most retailers during a downturn - just as discount stores tend to do better with a recession. The fact they aren't should be a red flag that there's more going on.

A good clue is what happened with Etsy. A group of market-specific sellers left Ebay, set up their own site and from what I can tell (I'm not affiliated) seem to be doing quite well. Enough of them left that similar products are no longer found on Ebay. If a buyer wants one-of-a-kind handicraft, they have to go to Etsy. Ebay isn't profitable for those type of sellers anymore.

That's not the only example and really hurts Ebay. That's not a reflection of just standard "market-forces" that are affecting everyone. Ebay probably would have seen a downward turn without a poor economy as a result of poor policy and planning.

The fact that the economy is down just confuses what's really going on and has provided an easy excuse. One thing bad economies do is trim companies out that don't have effective and responsive business models. If Ebay doesn't take a good look at what this last flood of policies has done - without being victimized - then it's only a matter of time before they will be shutting their doors. That would be a shame.

[DP]

What happened to part two? It's been a week already since part one!

[Emily]

Economy is down. eBay follows. Many eBay sellers are looking for other online shopping carts to sell and promote their products. Many small online shopping carts are fantastic and can bring double traffic. I use http://system.fastcommerce.com/ now. The system is much cheaper than eBay. 2000 items for only $29.95!

[Sunshine]

Regarding the layoffs, I just got a message from ebay saying that the Top Seller Account Manager department has been 'restructured' and I have been assigned a new manager. I wonder if some of the layoffs hit that department?

[C]

Just wondering where part two is??????

[Jeff Miller]

This is a really good analysis. I'm looking forward to your second part.

While I think that a management issues are contributing to their downturn, now not the times to sell. The macro market has such a large affect on them that

[Patricia013]

Well, you can look over numbers and you can ask all the analysts. Ebay is going down! I feel this is mainly because small sellers and a lot of powersellers as well have been trampled on so badly by Ebay that they threw up their hands and left! Those sellers are also BUYERS, a fact everybody kinda wants to ignore. Its NOT the economy. I've been beefing up my own website, http://www.watercolorsbypatricia.com and its doing FINE in outright sales and in commissions....and most of my customers were brought over right from my customer base on Ebay. Some sales from Bonanzle and also from Etsy and I'm doing rather well without the strangling new rules, without the blood sucking fees! I'm sure I'm not alone in doing this - I imagine most of the sellers who left are doing likewise.

Ebay...the classic Ebay should be doing a booming business in this kind of an economy. The holidays are coming and people will be looking for bargains because money is tight...well, this year they won't find them on Ebay...hence, Ebay's big problem! I don't need analysts for that. 10 years of selling on ebay gives me that experience in the school of hard knocks!

[G. Van der Staafen]

You say "I have some data to throw in the pot later on this point."

You are swimming in data. Data, on top of data on top of more data.

What you just don't get is that eBay is B-R-O-K-E-N. You are long-winded on eBay. You are grasping to portray this company in a good light.

I have never seen such denial. You are an intelligent man and I just can't wrap my head around your thinking. Best Match doesn't work, the company has alienated its customers (the sellers), there is a major glitch almost daily, and in my opinion their CEO is among the most loathed CEOs in the country (by his customers, again the sellers). Who will follow a CEO who is so un-liked?

Do you ever step back from your data and open your eyes to the problems using plain simple common sense? I don't write this to offend but really, enough is enough.

[Chris @ TameBay]

The "eBay: Fall of a Franchise" from Imran at JP Morgan may have some incorrect assumptions in it. It states that "the company has yet to deliver meaningful improvements in search functionality or user experience, which we believe is evident in the inverse relationship between the listing growth rate and conversion rate", which appears to miss the point that from September eBay rebalanced fees to encourage sellers to list all of their inventory on eBay.

If we can assume a fair proportion of sellers have increased their listings dramatically than it stands to reason that conversion rates would fall. Imran asked a question on this during the 2008 Q3 Earnings call but it appears he may not have understood the full implications of the answer (or maybe it just wasn't answered very well).

His analysis could be based on misunderstanding the new fee structure and it's effect on the listings count. Mind you that doesn't mean he's definitely wrong to downgrade the shares ;-)