The hints at an operating rebound that eBay ( EBAY -0.64% ) announced a few months ago are looking more like a reality today. The online marketplace recently posted steady sales growth and improved profitability thanks in part to tweaks that the management team made to its marketing and customer retention strategies.
Those successes weren't strong enough to convince CEO Devin Wenig and his team to lift their modest sales outlook for 2019, but executives did raise their earnings prediction for the second straight quarter.
In a conference call with investors, eBay explained the reasoning behind the steady revenue forecast while expressing confidence in its big-picture growth approach. Below are a few highlights from that presentation.
A different kind of buyer
We've been reducing and redeploying low [return on investment] marketing spend, resulting in less [sales volumes] in the short term.
eBay's buyer base grew by 4%, or exactly the same rate that the company has managed in each of the last five quarters. Yet the composition of that base is changing. Executives are directing their marketing toward new buyers and recently lapsed buyers (meaning a person who has recently passed a year without making a purchase). This marks a change from the wider promotions the company had made toward more of its subscriber base.
As a result, it is getting more engagement out of buyers today even though its base isn't growing at the 5% rate that investors saw through most of 2017. Still, the change is pressuring sales volumes, which were flat overall and down 5% in the U.S. market.
Death and taxes
One emerging challenge for our small business sellers in the U.S. is the rapidly evolving landscape for internet sales tax.
States are quickly moving toward requiring third-party sellers to charge sales taxes, effectively raising prices for buyers. In fact, eBay estimates that 30 states, covering the majority of its U.S. volume, will have such regulations in place by the end of the year compared with just a few in early 2019.
That shift is pressuring sales, especially on expensive items, to the tune of over 1 percentage point this past quarter. U.S. volume shrank 5% in Q2 to mark its third straight quarter of declines. The company is doing what it can to help soften the blow from this tax change, but CFO Scott Schenkel said the team sees the dynamic on pace to "continue and likely accelerate for the rest of the year."
Nurturing the new growth lines
We expect to end the year with more than $700 million in total ad revenue and we're well on track toward our goal of $1 billion in ad revenue over time. For payments, we continue to see accelerated adoption of managed payments in the U.S.
The company's two new growth areas, payments processing and sponsored advertisements, continue to show promise as more sellers take advantage of the new offerings. The new lines aren't material contributors to revenue gains yet, but executives believe they'll quickly begin to impact results. That confidence is clear from the fact that eBay plans to continue pouring resources toward scaling these new services across its global portfolio over the next few quarters.
No news on major sales
We're making significant progress in actively reviewing the role and value of StubHub and Classifieds in our portfolio.
Executives had no updates to make regarding their plans to perhaps divest noncore business like StubHub and eBay Classifieds. That's a disappointment for investors who are hoping such a deal will spark major capital returns or a big inflow of cash.
For the time being, then, shareholders have to be happy with the company's steady (albeit modest) sales growth and improving profit profile. These gains might inform a more aggressive 2020 outlook, which the company plans to discuss following its Q3 results in just a few months.