eBay's (EBAY 1.97%) fiscal year is half over. The company affirmed its guidance for the total year in its earnings release last week, although it indicated that it would hit the lower end of the expected range for revenue and earnings. As a result, eBay's stock has declined nearly 10% since. Is there any sense in trying to parse Wall Street logic? As Fool contributor Stephen Heller pointed out last week, the earnings report should have increased long-term investors' confidence. Let's look at three pertinent points you won't want to miss when evaluating eBay over the next two reporting quarters.
Understanding "enabled commerce volume" and the "take rate"
eBay has recently started reporting a metric that combines the total volume transacted over all of its business segments, known as enabled commerce volume, or ECV. If you divide eBay's revenues over any given period by its reported ECV, you get the company's "take rate" -- that is, the percentage of the total pie that eBay charged for the volume of business transacted over its segments. For example, in eBay's most recent quarter, the company posted $3.88 billion of revenue, which was derived primarily from charges on $50.6 billion of transactions the company helped enable through its Marketplaces, Payments, and Enterprise segments. Thus, the total take rate for the quarter was 7.7%.
The ECV is a very handy metric that eBay investors should follow with interest. Over time, expect the ECV to increase and the take rate to decrease, because eBay's fastest-growing segment, Payments, which includes PayPal and Bill Me Later, generates less per transaction than the larger Marketplaces segment, which includes online auctions. But it also has the most potential of the three segments to grow total volume. Payments revenue in the first half of 2013 grew 19% versus the prior year, from $2.67 billion to $3.17 billion, compared with Marketplaces revenue, which grew 11.7%, from $3.54 billion in the first half of 2012 to $3.96 billion in the first half of 2013.
While the take rate for Payments is 3.8%, about half of the company's overall rate, the potential volume long-term for PayPal, Bill Me Later, and other Payments products is large enough that the company has an interest in growing these brands as quickly as possible. Remember that currently, eBay's total ECV for the second quarter was roughly $51 billion. We can look to Visa, an indirect competitor, for an example of the scale of the market. Visa enables electronic transfers over its networks of more than $1 trillion each quarter. This is why eBay won't mind a lower take rate over time -- as long as it can corral increasingly larger volume through its own payment networks.
Taking on expense in the right places
One early trend from 2013 is worth examining closely: The company's "provision for transaction and loan losses" is up 39% in the first two quarters of the year, from $265 million in the first half of 2012 to $368 million this year so far. There potentially can be a negative trend here, as it may indicate unexpectedly higher losses on loans and a deterioration in credit standards.
In eBay's case, the increase in provision for losses is the result of calculated risk the company is taking to grow. In services including Bill Me Later, which essentially functions as a consumer loan at the point of sale, the company is willing to incur a bit more credit risk and write off incrementally higher consumer bad debt, to grow top-line revenue and its global base of customers. According to management, the company is targeting a return on net assets deployed of 14%-16%. Recently, eBay has been shooting for the high end of the range for this internal metric, hence the increased credit risk and higher charge-offs. The company has indicated that charge-offs will probably stabilize over the next year, so this is a line item we will want to revisit next quarter to see if the change in the expense is starting to level off.
This is how to use offshore cash
You may be familiar with the conundrum that many American multinationals face as they accumulate cash from operations overseas. Cash earned in foreign jurisdictions often idles in foreign bank accounts, as companies are reluctant to pay U.S. taxes on those earnings when the dollars are brought back home. That's the reason Apple famously elected to issue bonds to pay for dividends and stock buybacks earlier this year rather than use the colossal reserves of cash it holds in other countries. eBay has a rather clever way of insuring that its own foreign cash reserves don't sit uselessly while earning measly short-term money market rates: It uses its offshore cash to fund the international growth of Bill Me Later. The Bill Me Later loan portfolio showed a balance of $2.4 billion at the end of the last quarter. According to eBay, 65% of these loan receivables were funded with offshore cash-- a good example of how the company is using its capital quite efficiently.
Looking forward to the second half of 2013
If you're invested in eBay, don't let the near-term weakness in the stock undermine your confidence: Stay the course. The company has a simple but effective strategy to grow its revenues globally through increased transaction processing. Its revenue growth and profit margins continue to impress, and the company has a diversified suite of services available to widen its transaction volume. Check in on the ECV growth and take rate every quarter, and keep an eye on those loan loss provisions.
