Auction Blog

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: ”
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  –>

  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: “
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  –>
  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: ”
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  –>
  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.

Originally posted here:
eBay’s Q3 and what it means for sellers - I of II

Today eBay's search engine has been down all day (see screen shot below).

The good news is that the paid-search advertising seems to be running just fine.  Maybe this is just a test to see how the site monetizes with 100% ads vs. all those annoying listings+gmv and what-not? 

What's also interesting is since the home page is very search driven it's causing all kinds of wacky behavior there too.

I'm getting increasingly concerned that all of the changes plus the influx of fp30 listings plus bugs upon bugs that are taking weeks to fix have so destabilized the search code that eBay can't get it stable for Q4.  Wait, we're in Q4…, ok, Thanksgiving++.

(Scot rips hair out and bends finger nails back knowing tomorrow's GMV report is going to be really really bad).

My advice to sellers - go buy some Yahoo! keywords in the US if you want some eBay exposure. While search is down they are getting all the traffic you paid listing fees for.

View original post here:
eBay’s search has been down all day - this can’t be good for Q4

When eBay pre-announced that they would come in at the low end of their Q3 revenue guidance and on the high end of EPS, most Wall St. folks started to think more about Q4/09.

Personally, I was impressed with this performance given some of the GMV slowness we saw on eBay and was wondering where the revenue+profits would come from to hit those numbers.  Today eBay announced Q3 results here and the answer is what I had guessed (hint - it isn't GMV).

In the marketplace business, revenue was up 4% y/y.  GMV was down 1% y/y and here's the catch - advertising was up a whopping 127% y/y.

I don't know what the FX-adjusted GMV was, but won't be surprised if it's ex-fx down 4-6% y/y globally and I'd bet 10% in the USA.

The bulk of this comes from the increased monetization of eBay pageviews with banner ads, skyscrapers, home page placements, and the increase of paid links on the site.

I want to do a lengthy post on this after the Q3 dust settles as I (and many sellers) scratch our heads on why eBay is taking such a short-term view of these ads and really sacrificing GMV (and placement that sellers have paid for) vs. removing the buyer-distracting ads and

The way we're going, I'm very concerned eBay will become an advertising site with some GMV on the side and that's definitely NOT the way to fix this marketplace.

Q4 looks very light
The street has Q4 at $2.3bn/.43 and eBay's press release has guidance of $2.02-2.17 and .39-.41.  The stock is getting hammered down to $15 and lower in AH trading, but we'll have to wait and see what analysts think and also if eBay gives any view into 2009.

More to come
I'll have some more thoughts after the conference call. Here's a tip - you can see the presentation already here.

SeekingAlpha Disclosure: I am long google and eBay

Credit:
eBay’s Q3 results first impressions…

Here is the original post:
Advanced Amazon webinar and other ChannelAdvisor items.

This morning, eBay made a major multi-faceted announcement and held a conference call with analysts.

First, eBay is laying off 10% of its employees as has long been rumored. This is 1000 employees, many temporary and contractors.  This will result in $150m in annualized savings.

eBay then did a good job of lumping in a bunch of other announcements so not much attention was given to the layoffs.  In fact no information was given to the departments or nature of the folks impacted.  We'll keep an eye out for that information as it becomes available as sellers are very concerned about impact to customer service (buyer and seller).  eBay is going to take a $70-80m charge for the layoffs.

Secondly, eBay confirmed Q3 guidance, with a low-end revenue and high-end EPS view.

Thirdly, eBay announced some classified sites in Denmark for $390m.

Lastly, and definitely the biggest (and in my mind riskiest) announcement today is that eBay has acquired BillMeLater (BML).

BML is an interesting business with perhaps deeper retailer checkout penetration and TPV than off-eBay paypal.

Background on BML
BML has had a great business over the last 3 years. BML really started ramping up in 2006 and in holiday season 2007 hit its stride by offering consumers off-credit-card credit on the fly.  The way it works is a consumer goes to checkout and BML is there as a mark beside Visa/MC/Amex/etc.  When the consumer chooses BML, they enter their SSN and then are either approved or not approved.

For many consumers, if they have a high enough score, they are given 'super sized' approval (e.g. $100 in cart, $200 is approved) and thus retailers love it because it improves the average order value.  Consumers love it because:

1. It's safe - only your SSN is transmitted (personally that freaks me out more than my credit card)
2. It's 'free credit' - it isn't on your credit cards so you either
   1. Keep room on your card or
   2. if your card is maxed out, you get effectively another credit card

Industry lore is that eBay tried to buy BML last year, but BML rebuffed and said they wouldn't sell for less than $2b.  eBay decided to compete by adding similar functionality to Paypal with something called PayLater (PPPL).    As best I can tell, PPPL hasn't had any traction as it was too conservative only working on transactions in the $50-100 range and was only offered in express-checkout which has very little retailer adoption.

On the back-end, BML acquires loans from some institutional company and that's the piece I don't think anyone understands and wasn't really illuminated in the call.

BML stats
Some datapoints revealed today about BML's biz:

• BML is offered by 75 of the top 200 merchants in the IR500. 
• BML's Transaction Payment Volume (TPV) is $1b/yr (2008E) vs. 800m last year (25% y/y)
• BML's revenues are estimated to be $130m this year (meaning eBay effectively paid  7x revenue) (see my risk factors below)
• BML has a 46% repeat user rate (like a credit card once consumer gets the BML credit, if they don't use it, they can come back)
• BML has 4m registered users (vs. Paypal's 80m+)
• BML has a 12.5% take rate on TPV
• BML's profitability wasn't really detailed

The Acquisition

• eBay is acquiring BML for $820m and $125 in options
• The deal will add $150m in 09, and dilutive by $.06 on EPS
• Will be accretive by 2011 (wow, long time for a payoff)
• eBay will be assuming a $550m book of receivables (yikes, that sounds like almost all of last years TPV).
• John Donahoe said the acquisition is less than half it would have been a year ago on the conf call.

My Risk concerns around BML
BML was huge last holiday season based on our data and there's a real business there and overall I think it does make sense to be part of Paypal, long-term and it does achieve some of the strategic pieces that Donahoe covered on the call (extend to larger retailers, etc.).

However, I have three big areas of concern around BML:

• Short-term risk: In the eBay deck this am, they showed the 2008E revenue for BML at $130m.  As with any retail-based business, I'm sure at least 30% if not 40% of their revenue comes in Q4, which is front of us. If we have a slowdown, I'd guesstimate that there's a good 20-30m at risk in that 08E.
  • They then guided 150m in revenue next year for BML. Why would eBay buy something growing at 25% and then slow it down vs. accelerate?
• On the front-end (consumer facing) , I'm sure this holiday demand for 'cheap' credit will be extremely high as consumers are maxed out on their houses and credit cards.  So BML will have a lot of requests for transactions.  However, they may need to really jack up the level at which they give credit and if they don't manage that right they could either have lower than desired TPV or higher with more risk involved.
  • A second issue with the demand side is that as they raise the bar on credit, it results in a poorer consumer experience.  Right now most consumers get the credit, but imagine only 5% get it, that's a bad buyer experience and BML could get a retailer backlash if consumers put that bad experience back to the retailer.  The BML CEO admitted they do this on the call.
  • Thirdly on the front end (consumer) as consumers fall over due to the economic issues, you could see defaults rise substantially.
• Last and certainly not least.  BML on the back end (commercial lending - b2b) takes credit and issues it to consumers on a per-transaction basis.  Think of it as taking big chunks of credit ($550m out there right now I guess) and then chops it into little $100-500 chunks.  It's no secret that the credit markets are a total trainwreck and eBay just got itself squarely involved in a credit 'middle man' business.
  • I'm guessing eBay will fund this off their very healthy balance sheet and/or leverage their credit facilities.
  • What if BML is integrated in Paypal (who has $60b in TPV/yr as of Q2) and let's say they get a great adoption of 10%. That's $6b of credit.  While eBay has a pristine balance sheet, I don't know what would happen if something like this happened.  Of course eBay+BML can control this outflow of credit, but it's an interesting and important exercise to look at and understand the scale of the back-end credit piece eBay could have just bitten off.

On the call, the BML CEO referenced their years in credit as being able to mitigate this, but that didn't really allay my concerns as we face a credit world unlike any ever seen  before so how do you model that?  The CEO also insisted that it isn't credit, which didn't make any sense to me - if it quacks like a duck and walks like a duck….

I left the call feeling like this was a bailout of BML and concerns around eBay+Paypal getting into the credit business in a BIG way.  I don't know how much experience they have with that and even if they had tons of experience, they are now subject to the crazy gyrations of the credit markets.  e.g. LIBOR going up now matters to eBay and historically nobody really cared. 

Integration
The trick as with any M+A is for eBay to integrate this right.  For example, if they shutter BML and try and offer it as PayPal PayLater, that wouldn't be smart.  The Paypal team has a better history of M+A (verisign, etc.) than the rest of eBay so I think integration risk is pretty low here.

I wonder if they will report both TPVs or try to blend them and I also wonder if they will push for a Q4 integration - seems unlikely as the deal isn't even closed yet so they can't begin in earnest yet.

Amazon and BML
Last December, Amazon invested in
BML and now offers it as an option.  It's going to be interesting to
see if Amazon can get BML off the payment options before the holidays
or will they chose to continue to partner here?

eBay platform and BML
It will be interesting to see if eBay can get BML out for the holidays and if they pass any of the benefit (free transaction payment) on to sellers or if they hose sellers over and charge them Paypal rates for something that would normally be free off-ebay.

The Bottom Line
The layoffs will probably be viewed as net positive as they will reduce costs and improve profitability going into some severe Q4/09 headwinds. The BML acquistion is one that will have to be watched closely long-term.  Short-term given the unbridled fear of the word 'credit' right now, I expect the market to punish eBay severely for this acquistion and I suspect eBay will lose much more than the $1b it paid BML in market cap in the short term as investors flee in fear from the dreaded C word.  The only thing worse timing-wise eBay could have done is announced some kind of sub-prime lending effort.

Long-term I definitely agree there are synergies in the two businesses, but I don't think we'll see them until Q409 and with the guidance BML won't even be accretive until 2011, so this is a very long-term play and right now the market isn't thinking past lunch, much less 2011.  We'll be tracking the integration very closely as it will have implications for eBay sellers both on and off eBay.

SeekingAlpha Disclosure: I am long eBay and Google

More:
Big eBay news this am - layoffs, acquires BillMeLater (gulp)