Highlights From EBAY's Q3 Conference Call: PayPal Continues to Gain Share, eBay has Stabilized and Showing Positive Trends

October 22, 2009 2:03 PM EDT

eBay (NASDAQ: EBAY) reports Q3 EPS of $0.38, ex-items, 1 cent better than the analyst estimate of $0.37. Revenue for the quarter was $2.2 billion, which compares to the estimate of $2.14 billion.

Highlights From EBAY's Q3 Conference Call:

• Sees Q4 adj-EPS of $0.38-$0.40, versus the consensus of $0.40, and sales of $2.20-$2.30 billion, versus the consensus of $2.26 billion.
  
• (CEO) Our Q3 revenues topped 2.2 billion with organic growth up 5% over the prior year.
  
• Our non-GAAP EPS was $0.38, and we generated free cash flow of $563 million during the quarter.
  
• PayPal continues to gain share and drive strong global growth across e-commerce.
  
• EBay has stabilized and is beginning to show some positive trends. Core GMV accelerated for the second quarter in a row.
  
• And we announced the sale of Skype this quarter, setting this terrific business on a path we believe will enable it to achieve its full potential.
  
• PayPal had a strong quarter, with revenue, total payment volume, and active registered accounts up across the board. PayPal's penetration on eBay increased six points year-over-year to nearly 66% globally, driven by a more streamlined checkout experience and increased adoption of electronic payment.
  
• And we just announced the integration of Bill Me Later into the PayPal wallet, both on eBay and across e-commerce, giving consumers more choice when they pay online.
  
• PayPal's merchant services business gained market share in all regions around the world, with total payment volume increasing 35% year-over-year on an FX-neutral basis, an acceleration from Q2.
  
• More than 100 large merchants in the U.S. have been signed thus far this year, expanding addressable sales for PayPal and Bill Me Later by $27 billion.
  
• In all, 44 of the top 100 U.S. retail sites now offer PayPal. And 24 of these now offer both PayPal and Bill Me Later, twice as many as last year. That includes 1-800 Flowers (Nasdaq: FLWS), Toys R Us, and Wal-Mart (NYSE: WMT). In the travel arena, nine of the 10 most popular airlines accept PayPal or Bill Me Later.
  
• Total payment volume was up 63% in Europe and 55% in Asia on an FX-neutral basis.
  
• In Asia, 12 of the top 100 online retailers now offer PayPal with a strong line of merchants in the pipeline. And we've intensified our efforts in Japan. PayPal signed agreements with two of the leading payment gateways in Japan -- SBI VeriSign and eContext.
  
• Sellers with detailed seller ratings of 4-8 and above continue to grow their businesses at double-digit rates, faster than e-commerce. In fact, year-over-year, same-store sales for these sellers in the U.S. were up about 13% in Q3 and accounted for almost 40% of total U.S. GMV.
  
• So for the first time, buyers who come to eBay looking for fast, trusted service can easily spot top-rated sellers by the prominent badge in search results. About 150,000 U.S. sellers qualified at the launch of this program earlier this month.
  
• In North America, for example, Dell recently opened an eBay store. Golfsmith and other leading Internet retailers have also recently added inventory.
  
• And in Europe, we opened eBay online outlet malls in the U.K. and Germany, offering buyers dozens of brand names sold directly by the manufacturers. Our product and technology teams, led by Mark Carges, are making great progress in delivering better user experiences.
  
• (CFO) Our combined businesses generated net revenues of 2.24 billion in the third quarter, a 6%
  increase.
  
• Organic revenue was up 5%, an acceleration of four points versus Q2. The acquisitions of Gmarket, dBA, BilBasen, and Bill Me Later added an additional five points of revenue growth, while a stronger dollar lowered our revenue growth by four points.
  
• Non-GAAP EPS was $0.38 in Q3, a 16% decrease.
  
• Non-GAAP operating margin was 28.4%, down 340 bps, again driven by dilution from Bill Me Later and a stronger dollar.
  
• We generated 563 million of free cash flow in the quarter, or 25% of revenue.
  
• CapEx as a percentage of revenues was 8%, an increase compared to the first half of the year due to timing of expenditures on our new Utah data center.
  
• For full year 2009, we anticipate CapEx as a percentage of revenue will be similar to 2008. Return on invested capital was 21.9% on a trailing 12-month basis. The decline over the prior four quarters is primarily attributable to recent acquisitions. While these acquisitions are causing near-term pressure
  on ROIC, we believe they will generate attractive long-term returns for our shareholders.
  
• PayPal posted another strong quarter. Total revenue was $688 million, a 15% increase. Total payment volume was 17.7 billion, an increase of 19%.
  
• PayPal's transaction margin remained flat at 62% in the quarter.
  
• Let's now move to our marketplaces business. Overall, this business achieved net revenues of 1.4 billion, a 1% decrease from last year, but a 13-point improvement from Q2.
  
• Our classifieds business continued its strong growth trajectory with 20% revenue growth, or 27% on a FX-neutral basis. Total global advertiser revenue declined by 2% as we experienced continued pressure on CPCs and clickthrough rates.
  
• Shopping.com, rent, and other revenue declined by 16%.
  
• A couple of quick highlights on marketplaces operational metrics. Sold items grew at 31% in the quarter. Excluding Gmarket, growth was 8%, primarily driven by strength in the U.K., China cross-border, Germany, and StubHub. The number of tickets sold on StubHub increased 40% in Q3.
  
• Cross-border trade accounted for 18% of core GMV, up one point from Q2.
  
• Marketplaces' segment margin was 42% in Q3, down 70 bps. The marketplaces team generated solid productivity, which gave us the capacity to reduce take rates for our sellers and invest in the user experience.
  
• Global take rate was 7.9% in the quarter, down 27 bps from last year.
  
• Skype posted revenue of 185 million in Q3, an increase of 29%. On an FX-neutral basis, growth was 36%. Skype-to-Skype minutes increased 74% to 27.7 billion, and SkypeOut minutes increased 44% to 3.1 billion. Skype segment margin came in at 24.2%.
  
• Now let me turn to guidance, which assumes that the Skype deal will close in the middle of Q4. We anticipate Q4 revenue of 2.2 to 2.3 billion, including approximately 100 million from Skype. This represents growth of 8 to 13% compared to last year, or 11% to 16% on an adjusted basis, excluding Skype from the back half of Q4 2008.
  
• We anticipate non-GAAP EPS of 38 to $0.40, including approximately $0.02 from Skype, a 2 to 7% decline compared to last year, or a minus 3 to plus 2% on an adjusted basis, excluding Skype.
  
• (Q&A) First, on the payments margins, can you talk about how we should think about those going forward? Once the anniversary -- once you anniversary the acquisition of Bill Me Later, do they stabilize and start growing from there? Or is it uncertain? Could they just as likely they go up as down? And then Marketplace, could you provide any more color? Anything on the linearity of the quarter, particular products or areas or segments that seem to have picked up better than others? Is there something that makes you think, particularly in the marketplace business, that Q4 should be materially better than just comps?
  (A)First on PayPal operating margins, I'll give you a bit of a macro picture, and then a path forward. We indicated earlier this year that we expect to roughly double the PayPal business from 2009 through 2011, and that operating margins will expand to 18 to 20%. This year, essentially each quarter, Bill Me Later has impacted our margins by roughly 350 to 400 basis points. And as we go forward, we expect Bill Me Later to gradually be accretive to earnings, and then accretive to operating margins between now and 2011. We do not expect that to change dramatically in the fourth quarter. We're not expecting any dramatic growth from Bill Me Later as we continue to make the trade-offs of top line growth versus risk. On the second question, on Marketplace, maybe a couple of comments from John,and have you engage as well. Yeah, I'd say a couple of things. One, we saw continued trends overall throughout the quarter, so just timeline wise, last time we spoke to you, we had June and early July a little bit better than earlier in the second quarter. Those trends kind of continued throughout the course of the quarter. On a geography basis, we saw great momentum in the U.K. Good momentum in Asia, particularly in Korea with the combination of IAC and Gmarket. Good momentum in Germany, and accelerating progress in the U.S. While we're still down in the U.S, we saw five-point improvement on GMV from Q2 to Q3. So, we felt pretty good about relative to how the market performed in the quarter. And that -- both by geography and just timeline, we expect continued momentum going into the fourth quarter. But John, just -- any thoughts from your perspective?
  (A)I would just say, as Bob said, the economy we see is stable. And we're cautiously optimistic about consumer spending going into the holiday. But what is more important from our standpoint is we actually see some progress on our turnaround metrics, and as Bob mentioned, they're kind of across geographies and across categories just a little bit. And the three outcome metrics that I continue to look at our net promoter scores, which is both for buyers and sellers, the willingness they are to recommend eBay to a friend and those are up, both across buyers and sellers. Second, the velocity on our site, which as I mentioned earlier, has accelerated to 8% growth, both sold and purchased items in the quarter. And then, most importantly, the market share, which we measure by GMV growth and our global GMV growth in Q3 was 4%, which we believe will end up being faster than the market grew in the third quarter. So, we feel like we're making good progress. We will continue to make progress into the fourth quarter and into next year. I don't see anything discontinuous, but I do see good progress across the board.

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