eBay (NASDAQ:EBAY) isn't giving up on its growth hopes. However, the company isn't going to keep directing cash toward underperforming initiatives, either. In the e-commerce giant's fourth-quarter earnings report this past week, investors saw how that shifting approach might lead to weaker sales through 2019, but also higher profitability and robust cash returns.
CEO Devin Wenig and his team detailed those trade-offs in a conference call with investors. Below, we'll take a look at a few highlights from that discussion.
What went wrong
We continue to experience consistent active buyer growth, which historically has driven GMV [gross merchandise volume]. However, more recently we've seen GMV growth drop below active buyer growth, the result of several factors.
-- CEO Devin Wenig
A 7% revenue increase from eBay's core marketplace platform last quarter allowed the management team to meet the lowered projections it issued back in July. The key sales volume figure worsened, though, especially in the U.S. market. After peaking at 8% growth in late 2017, domestic GMV growth has decelerated in each of the last four quarters, even falling into negative territory in Q4.
Executives took time during the call to explain why GMV is shrinking even though eBay's active buyer pool is growing at the same 4% rate it has for the past year. They said most of the slump has to do with tweaks they made to the buying process that haven't scaled well. Some of eBay's product pages are driving less website traffic and lower conversion rates, too. Management said there's no quick fix for either of these challenges, and so they're likely to pressure growth results well into 2019.
Changing cash priorities
The purpose of these [capital allocation] changes is to return more capital to our shareholders in a balanced way, highlighting our confidence in the free cash flow resiliency of our business and the opportunity ahead of us and to significantly reduce our share count ahead of 2020.
eBay has identified two promising growth avenues -- payments processing and advertising -- that it intends to support with increased investments this year. And while the company plans to continue improving the core marketplace platform, it plans to reduce spending in areas like marketing, development, and administration.
In other words, eBay's business is getting more profitable, but has fewer immediate investment needs. Management's response to this situation isn't to direct more cash at its growth challenges, but instead to boost investor returns. To that end, the company announced plans to send about $7 billion to shareholders over the next two years, mostly through stock repurchases, but also through a new regular dividend payment.
We are projecting 2019 revenue between $10.7 billion and $10.9 billion, growing 1% to 3% on an organic ... basis, and 0% to 2% on an as reported basis.
-- CFO Scott Schenkel
Management's initial 2019 guidance predicts that revenue growth will decelerate again, this time falling to about 2% from 6% last year and 7% in 2017. Executives said the biggest hindrances to growth will be the same core challenges that impacted last quarter, but with the additional headwind of lower marketing and advertising spending. "We'll take a more disciplined approach on marketing and reduce low [return on investment] spend, which will further constrain GMV growth in the short term ... while leading to a healthier ecosystem over the long term," Schenkel said.
Executives didn't make any projections about 2020, but the implication is that eBay could return to a better growth posture after passing through what management called a "transitional period" in 2019. If volume growth does accelerate again, shareholders could see impressive earnings gains, given the expected boost in profitability this year, as well as the lower outstanding share count the company will have in 2020. Investors will have to balance that prospect against the possibility that sales growth might stay stuck near zero (or worse).