eBay's Meg Whitman Thinks Positive
Efforts by eBay (EBAY) Chief Executive Meg Whitman to revitalize the company's core marketplace have yet to take hold, judging from third-quarter results released on Oct. 18. Gross merchandise volume rose just 17%, to $12.6 billion, and overall marketplace revenue grew only 22%, down from 35% growth a year earlier.
Still, investors seemed encouraged by a better-than-expected 10% increase in profit and a forecast that fourth-quarter sales will rise 22% to 26%. BusinessWeek Silicon Valley Bureau Chief Rob Hof spoke to Whitman and eBay Chief Financial Officer Bob Swan on Oct. 18. The executives look back on the third quarter and explain why they're confident heading into the crucial final three months of the year. Whitman also explains why next year, the company may hold off on issuing 2008 forecasts as early. Here are excerpts from that conversation.
How would you characterize eBay's performance in the third quarter?
Whitman: I would characterize this as a very good quarter for eBay. We grew revenue at 31%, EPS [earnings per share] at 28%, very good free cash flow. I would say we're exactly where we expected to be. We delivered at the high end of revenue guidance and three pennies ahead on EPS.
I would say we're quite well-positioned going into [the fourth quarter]. All three of our businesses exited [the third quarter] with some very good strength. September was a particularly good month for all three businesses, and I think we feel pretty good about where we stand.
How should we look at the fourth quarter and 2007 estimates?
Swan: Back in July, the guidance we gave for full-year '06 was roughly $5.8 billion, earnings of 98 cents to $1.01. Today's guidance is essentially the same revenue estimate for the year, but we've raised earnings guidance by two cents. That's really the result of coming off a real strong Q3 and feeling pretty good about how things are shaping up going into 2007.
One of the big questions is whether you've been able to recharge the core marketplace. I'm not sure I see signs of that yet. Marketplace growth was only 22%, gross merchandise volume only 17%, and non-Stores inventory listings are growing less than in previous quarters.
Whitman: We didn't expect to see much effect from the initiatives we took to rebalance the marketplace because many of them didn't take place until quite close to the end of the quarter. But we have seen the Stores listing growth decline, which is actually what we desired.
What we wanted to do was reduce the number of identical, not particularly competitively priced items that were showing up in the marketplace. So the price increase actually had that desired effect. And you're starting to see an increase in the percentage of core listings relative to the total. And you're seeing core listings growth stabilize, and obviously pick up as we head into the holiday season.
We're also seeing some early signs of core auction conversion rate improvement, which we believe means the buyer experience is improving again. So we're cautiously optimistic that the initiatives we took in Q3 will in fact have the intended effect.
Was there an expectation of a bigger impact?
Whitman: I don't think so. We were pretty clear with investors that they shouldn't expect to see much GMV results, though the 22% revenue growth was a little higher than they may have expected. Shopping.com also had a strong quarter, so that contributed to the overall marketplace's number.
How has the new shopping site, eBay Express, done?
Whitman: Express is actually doing quite well. The early result in the U.S. is that it's tracking to our internal expectations. The marketing campaign rolled out in September. GMV doubled, and we have maintained those levels post-campaign. We have an 89% satisfaction rate with buyers.
And one fun fact is buyers who shopped on eBay and eBay Express spent nearly 25% more than those who have yet to shop on Express. This is good for us, because the strategic focus of eBay Express was, can we get higher share of wallet of existing eBay buyers. We recently launched eBay Express in both Germany and the U.K. The early feedback from the merchants and the buyers is good.
Overall, GMV seems quite low, at just 17% growth.
Whitman: It's about in line with what we expected, given the marketplace situation that we face.
Swan: Our revenue for the marketplace in the third quarter was a little bit higher than we expected, so that was driving a lot of the favorability on earnings in the quarter. But we indicated we had some rebalancing to do, and we told the market we didn't expect to see too much benefit until we got into the fourth quarter. While early signs are positive, we still have a bit to learn on how the rebalancing plays out.
It looks like even the high end of 2007 revenue estimates are lower than analysts expect.
Swan: This is the first time we've really given any indication of how we see 2007 shaping up. At this time of year, our business is becoming increasingly seasonal—the fourth quarter is becoming a bigger and bigger part of our business. Secondly, the efforts around rebalancing, we're going to learn a lot more during the course of the fourth quarter. We gave our best view at this time on how '07 will play out.
Whitman: We're probably the only business now that gives 2007 guidance two weeks into our biggest quarter. A retailer would never give 2007 guidance two weeks into the fourth quarter. So it's increasingly challenging. I think we eventually will have to reevaluate whether next October, we will give 2008 guidance. I think the answer to that is probably no.