EBAY's better-than-expected results came even though marketplace gross merchandise volume (GMV) decreased for the first time in at least a year. GMV grew by 11% (ex-FX) in both 2Q18 and 3Q18, and by 1% in Q4. For this quarter, GMV fell by 4%.
The yr/yr decline in GMV is somewhat by design and is related to its strategy to remove a significant amount of promotional spending in its marketplace. The company found that these investments often subsidized higher-priced items at a low return on investment.
While the promotional content had boosted GMV through higher selling prices, it cut into the margins and profitability of items sold. Therefore, EBAY scaled back on promotional spending in 1Q19, which sank GMV, due to lower average selling prices. The upside is that Non-GAAP operating margin improved to 29.8% from 27.9% in the prior year period.
Moving forward, EBAY expects the gap between revenue growth and GMV growth to continue.
The company’s revenue growth hasn't been spectacular either, sliding to 2% this quarter from 6% in 4Q18 and 3Q18 and 9% in 2Q18. This lack of growth has made the company a target of activist investors: namely, Elliot Management and Starboard Value.
Those firms have been pressuring the company to conduct a strategic review of its assets, including the potential divestiture of StubHub and eBay Classifieds. On March 1, 2019 EBAY relented and entered into a cooperation agreement with Elliot Management and Starboard while adding independent directors to its Board.
Last night, EBAY didn't reveal any new information regarding its plans for StubHub or Classifieds, but the activist investors were provided with more fuel for the fire as StubHub's performance in Q1 was soft. Specifically, volume was down 2% and revenue was flat yr/yr. During the earnings call, management stated that volume was impacted by a weak College Football Championship game, as well as softer demand for the Super Bowl.
Ultimately, what Elliot and Starboard are seeking is a streamlined EBAY that can generate improved profitability and value creation. For its part, EBAY has taken some important steps in achieving that goal, including consolidating all its marketplace regions under a single leadership team, while also investing in its payments and advertising efforts.
Furthermore, on the same day EBAY began its strategic review (3/1/19), it initiated its first quarterly dividend in its history, paying out $0.14/share, and it boosted its share repurchase authorization by $4.0 billion.
These actions, together with its strategy to drive higher margin marketplace sales, are positive steps in making EBAY a more profitable company, and, a more attractive investment choice.
Key Takeaways: From a top-line growth perspective, there still isn't much to be excited about as revenue increased by a scant 2% this quarter. However, investors are pleased that EBAY's strategy to improve margins, grow EPS by double-digits, and return more capital to shareholders is coming to fruition. Additionally, EBAY's newfound willingness to consolidate its business, possibly through spin-offs of lower-margin segments, could create another catalyst for the stock down the line.