eBay’s Earnings Continue To Be Impacted By Cyber-Attack
eBay (NASDAQ:EBAY) posted lukewarm earnings in the third quarter, with revenue rising by 12% to $4.4 billion. This was primarily driven by 20% growth in the payments’ business, as the marketplaces’ segment continued to face headwinds. The latter’s revenue growth slowed to 6% in Q3, as compared to 11% and 9% growth in the past two quarters, due to reduced levels of traffic caused by security breach and changes in Google SEO (i.e., Search Engine Optimization) algorithm.
The operating margin (GAAP) decreased by 260 basis points annually to 17.9% in Q3, as higher expenses were incurred on sales and marketing to stem the recent fall in traffic. Looking ahead, the company has lowered its revenue guidance for H2 2014 by around $300 million, and now expects full 2014 revenue in the range of $17.85 – $17.95 billion.
We expect the Paypal segment to see high growth in the future as well, however, the marketplaces’ business could continue to feel the impact of traffic-related challenges in the short-term. We expect these short-term headwinds to weigh on the company’s profitability. However, in the long-term, we believe eBay has a strong business model and will gain from the rapid growth in the global e-commerce and online payments market. The spin-off of PayPal should create positive value as both segments face unique challenges, and a separation will allow them to better align their strateges, capital allocation, and cost structure. While the separation will be completed in the second half of 2015, the synergy between the two companies is expected to persist for the long-term.
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Ongoing Momentum In The PayPal Segment Will Continue To Drive The Business
PayPal, as expected, was the star performer, and its revenue rose to $2.0 billion, during the third quarter. It gained 4.4 million new active registered accounts in Q3, taking the total to 157 million. This contributed to around 29% rise in total payment volume (TPV), with the total number of payments growing by 23% compared to the same period a year ago.
Merchant services’ TPV was up by 37%, compared to 9% for on-eBay volume, owing to increase in merchant coverage and customer adoption. Going ahead, we expect strong top-line growth in this business to persist, due to PayPal’s strong brand image and leading position in the mobile payments market. Mobile payments volume rose by 72% during the quarter, and comprised 20% of the total payment volume. [1] Product innovations (such as One Touch payments), high growth within the recently acquired subsidiary ‘Braintree’, and expansion in the mobile payment market will fuel demand in this segment in the future.
Considering the changing landscape of online payments, with introduction of newer players such as Apple Pay and Alibaba, separation from Ebay will strengthen PayPal’s focus on leveraging growth opportunities and tackling challenges.
Softness In The MarketPlaces Segment Could Continue In The Short-Term
The marketplaces segment under-performed during the quarter, as traffic continued to be impacted by security breach that was seen in May 2014. The company had asked all its users to change their passwords as a safety measure – this led to a slowdown in buying activity as some users did not change their passwords but exercised caution. Changes in Google’s SEO algorithm and weakness in the StubHub business also weighed on the segment’s results in Q3.
eBay Marketplaces’ gross merchandise volume (GMV) rose by 9% during the quarter, with 3.4 million net additions in active buyers taking the total to 152 million. While fixed price transactions, which accounts for 79% of total GMV, increased by 15%, auction growth fell by 7%. [1]
We expect the headwinds in this segment to stay in the short-term. We believe that it will take a few quarters, before eBay is able to overcome traffic-related challenges. Over this period, the company will have to incur higher expenses on sales and marketing, which will weigh on its profitability. Having said that, the marketplaces segment has a strong business model, with strong margins and cash flows. We expect eBay’s strategy to focus on certain key customer segments, enhance sales and marketing efforts, and undertake SEO related changes to result in recovery within this segment in 2015.
We are in the process of revising our $67 price estimate for eBay’s stock.
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- eBay’s (EBAY) CEO John Donahoe on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 15, 2014 [↩] [↩]