eBay Still Hazy

Yesterday eBay reported a third consecutive flat quarter with Q2 revenues of $2.2 billion, an increase of 20% over the year. The Street was expecting similar revenues, so no surprises.

Marketplace transactions brought in $1.5 billion – a 57% contribution and an increase of 13% over the year, but a 2% sequential reduction. Active users grew by 1% over the year to 84.5 million. New listings increased by 19% over the year and 3% over the quarter to 666.9 million.

PayPal’s $0.60 billion revenue represented an annual increase of 33%. Total payment volume grew 35% over the year to $14.9 billion, and global accounts increased by 19% to 62.6 million. PayPal is fast becoming a more important business for eBay than its flagship Auctions / Marketplace business.

Skype contributed $0.14 billion, an increase of 51% over the year and 8% over the quarter. Skype added 29 million registered users for the quarter, taking the total base to 338.2 million.

Overall, international markets contributed 54% of overall revenue.

The company gave Q3 revenue guidance of $2.1 billion-$2.15 billion with EPS of $0.39-$0.41. For the year, they raised revenue and EPS guidance to $8.8 billion-$9.05 billion and $1.72-$1.77, respectively.

Even though CEO John Donahoe called the quarter a solid one, there are several areas of concern. The faster growth of lower margin segments – namely PayPal and Skype – has started impacting overall margins.

On the positive side, eBay did make several significant advances during the quarter. The site is easier and safer to use, and a modified pricing structure and incentives for sellers have improved the value and selection offered to buyers. The company rebalanced their pricing by migrating from insertion fees to final value fees, offered free gallery photos in the US and the UK, rewarded sellers who provided the best buyer experience, and also offered sales ratings-based discounts to qualified power sellers. They extended PayPal’s leadership position in online payments both on and off eBay and added a credit facility to PayPal through Buy Now Pay Later options.

Despite these service innovations, the weaker economic conditions are affecting eBay’s performance. Gross Merchandise Volume (GMV) for their marketplace segment stood at $15.7 billion, an 8% increase over the year but a 2% reduction over the quarter. The reduction was due to customers’ shifting to lower-priced goods, a modestly lower take rate, higher discounting for the power sellers who continued to improve their service levels, and weakening car sales, which had grown 7% in the previous quarter.

EBay may be getting more listings and improving security for their users. But what they are still not managing to fix is the core user interface and deliver a personalized user experience.

I had envisaged a turnaround opportunity for eBay with the departure of Meg Whitman. Unfortunately, John Donahoe’s game plan continues to be hazy. Meanwhile, Rajiv Dutta, the head of Marketplaces, will step down in October, and with that, there might be a ray of hope.

Given that eBay still hasn’t managed to hive off Skype and acquire more relevant vertical search engines and communities, I wouldn’t recommend the stock. It rose 5% to $28.23 during the regular trading session but fell 6.6% to $26.24 after market close.