In a booming e-commerce industry where many companies are prioritizing sales growth over profitability, eBay (NASDAQ:EBAY) is headed in a different direction. The online marketplace giant this week posted fourth-quarter earnings results that paired slower revenue gains with increased margins and cash flow.
Executives projected close to zero growth for fiscal 2019, too, even as profitability rises and an increase in cash flow is funding stock repurchases and a new dividend payment. Let's take a closer look at what investors can expect to see from this slower-growing, but more efficient, business.
For the year, eBay posted 6% higher sales after accounting for foreign currency swings. That result met the company's most recent guidance, but it was below the initial range management laid out for 2018 of between 7% and 9%. It also meant that growth slowed for the full year compared to 2017's 7% increase. In contrast, eBay had entered the period targeting its second straight year of accelerating gains.
Looking behind the headline sales number, investors can see the weaker demand trends playing out across the business. eBay's pool of active buyers has now increased by 4% in each of the last four quarters compared to 5% through all of 2017. Even worse, sales volumes were flat for the third consecutive quarter and fell to a slightly negative result in the U.S. market.
In a conference call with investors, CEO Devin Wenig explained that some of this slump can be blamed on temporary conversion issues and challenges with the structure of product pages. However, much of it is the result of more fundamental aspects of the business that aren't likely to change -- and don't seem to be fixable through simple tweaks like extra marketing spending. Thus, executives say they are prepared to "transition to a different eBay in 2020" that's better equipped to maximize profits in this tougher growth environment.
There was good news in the report, mostly having to do with eBay's finances. The marketplace notched its highest take rate (the fee it charges sellers that it has managed) in over a year. Most selling expenses dropped as a percentage of sales, too. Rising marketing costs offset almost all of those gains, but executives said they expect the costs to decline in the coming quarters. These financial wins translated into robust earnings growth and healthy cash flow.
eBay's two new growth initiatives, payments and third-party advertising, appear to be on solid footing early in their progress. The advertising platform kicked in $200 million of revenue for the year to beat management's targets, and the payments rollout is finding plenty of traction with sellers and buyers.
The new eBay
As the company had hinted at in recent quarters, it announced a change in its capital allocation program that includes its first-ever regular dividend payment. By scaling back on marketing spending, earning more through transaction fees, and gaining income from its payments and advertising initiatives, operating margin should climb to between 28% and 29% in 2019 compared to 27% last year.
These financial wins come with a tough growth forecast though. While executives plan to keep improving the buying and selling experience in the year ahead, they project that sales gains will slow to between 0% and 2% in the first quarter and to between 1% and 3% for the full 2019 year. Hitting the midpoint of that prediction would mean eBay's growth will have slowed dramatically -- down from 7% in 2017 to 6% last year and 2% in 2019. That underwhelming outlook helps explain why the company now has the type of cash-return plan that investors usually see at mature businesses with limited growth opportunities but attractive economics. eBay wouldn't have characterized itself that way just a year ago, but conditions changed quickly for the company in 2018.