PayPal Surges – eBay Marketplace Sags

When PayPal splits off into its own company — which eBay executives now say will be sometime in this year’s third quarter — eBay’s largest shareholder, Carl Icahn, may finally get clarity on the one question he’s made other investors ponder: is eBay holding back PayPal’s full potential?

While neither he nor investors will know the full answer for years to come, what eBay’s first-quarter earnings showed is the power of PayPal as a contributor to eBay’s overall strong financial performance. PayPal’s growth in revenue, transactions and mobile volume over the last 3 months helped the eCommerce company post a better-than-expected first quarter, while eBay’s Marketplace performance sagged for the first time since 2009.

PayPal’s total net payment volume grew 18 percent over the quarter to $62 billion. Merchant services volume for PayPal were up 26 percent. PayPal gained 3.6 million new active accounts in Q1, an increase of 11 percent, to 165 million registered accounts. PayPal also processed more than one billion transactions in the quarter, which is an increase of 24 percent. Customer engagement also spiked in the first quarter, as PayPal transactions per active account increased to 23 transaction, and monetization per active account jumped to $49.

“The strong, steady growth of PayPal’s customer base coupled with rising engagement reflects the growing popularity and relevance of the PayPal value proposition globally,” PayPal’s CEO-elect Dan Schulman said. “The acquisition of Paydiant helps PayPal extend its mobile value proposition to the offline world for merchants and consumers while its acquisition of CyActive strengthens PayPal’s security capabilities and will act as the foundation of PayPal’s new security center of excellence.”

PayPal announced its intentions to acquire Paydiant on March 2 for $280 million and closed earlier this month. The acquisition will allow PayPal to use Paydiant’s platform to enable merchant and bank partners to integrate technology agnostic, complete mobile wallet capabilities into their own mobile apps, and help further build its portfolio of products as it moves toward being an independent company.

“We’ve kind of reorganized PayPal around merchants and consumers. And when we did that we put Bill Ready in charge of the merchant segment. Bill as you know was the CEO of Braintree and what we really did by putting that together is really combine the Braintree platform and the PayPal platforms much more closely together so that we are able to being able things like One Touch not just on full stack integrations and on mobile, but into the PayPal base,” Schulman said.

“We think that the world is moving increasingly towards mobile payments that we have with the combination now of Paydiant, Braintree and the PayPal platforms, the leading mobile payments platform in the world. We did over a 1 billion mobile payments transactions last year,” he continued “You heard that this quarter you we’re up 40 percent year-over-year. We are taking things like One Touch and we want to put it right into our merchant onboarding process that we have for PayPal. And so we are taking the things that we’ve learned through both Venmo and Braintree, putting them together with some of our other acquisitions to provide to our PayPal embedded base, not only the services that you see now, but services that we will introduce even as of this quarter that will take us to a whole different level as a result of that integration together.”

Speaking toward eBay’s “technology agnostic” perspective, Schulman continued his skepticism toward NFC acceptance, while acknowledging that eBay is testing its own NFC systems itself. Still, for eBay, he still believes the future of an open technology payments platform is being “technology agnostic at the point of sale.”

“Even though NFC is starting to gain some momentum, it’s still probably 2-5 percent of the point-of-sale terminals out there in the marketplace, maybe more on a transactional basis. But it’s a small part. And I’ve seen many times where one technological standard is going to be merged and it’s eclipsed by something else. So what I would like the PayPal platform to be, and what we’re building towards — and have a lot of capabilities already — is the ability to utilize your mobile phone but not just via NFC, but QR codes, bluetooth, HCE. Really it depends on what the merchant has upgraded towards,” Schulman said.

He continued his slight dig at NFC technology by highlighting the gaps it overlooks for the industry.

“I think if you bet on a single technology, it’s a risky proposition and it takes a lot longer to move into the marketplace. …I’m a big believer that you don’t want to just enable a form factor change. We don’t want to just substitute a card swipe for a phone tap; you really want to think about what is the value proposition change that you are going to do,” Schulman said. “How can you with that phone tap enable a merchant to get ever closer to their consumers through rewards loyalty, couponing offering and associate that with the payment choice of type a consumer wants to pay with —  whether it be a debit card or credit card, private label, Bill Me Later, whatever it may be — that’s what we want to provide. And so you are seeing us look at our platform and our goals are to be the world’s largest open digital payments platform. And to do that we have to build with those tenants in line.”

In terms of the payments experience, Schulman remarked that PayPal is at the forefront of the payments industry in terms of adapting to change.

“We are currently in one of the most exciting periods for financial services. The online and offline payments worlds are digitizing and converging through mobile experiences,” he said in a call with investors yesterday. “Everything we’ve done in the first six months of my tenure is positioning PayPal to take advantage of what I see as one of the greatest opportunities for growth the payments industry has ever seen.”

eBay CEO John Donahoe confirmed that the company is “deeply committed to setting up eBay and PayPal to succeed, as two independent companies, an agreement reached just a few weeks ago showed the framework that will enable eBay to continue benefiting from PayPal’s robust growth — even as the two go their separate ways.

“We had a strong first quarter, with eBay and PayPal off to a good start for the full year,” Donahoe said in the company’s earnings statement. “I feel very good about the performance of our teams at eBay and PayPal. Each business is executing well with greater focus and operating discipline as we prepare to separate eBay and PayPal into independent publicly traded companies. We are moving forward with clarity and speed, with a smooth separation expected in the third quarter. We are deeply committed to setting up eBay and PayPal to succeed and to deliver sustainable value to our shareholders.”

The specific terms of the agreement will allow PayPal to pursue payments partnerships with other marketplaces and eBay to incorporate alternative payment providers to increase flexibility for both firms. That flexibility however does not include the ability for either firm to directly compete with each other – PayPal will not be permitted to create a rival marketplace and eBay will not be permitted to create a new payments platform once PayPal is spun off.

PayPal will remain contractually obligated to provide “most favored nation” pricing to eBay, as its largest customer. eBay will also implement incentives for PayPal to maintain an 80 percent penetration rate on its marketplace platform. This agreement will remain in place for five years (with a one-year transition period) and was designed to “focus on preserving the benefits of the existing relationship between the two companies and ensuring that the separation is seamless for customers of both companies,” according to eBay.

In terms of earnings reports, eBay’s CFO Bob Swan said as the company’s work toward standing independently, eBay would report on specifics of the full allocated operating margins and the value transfer associated with the operating agreements. He gave some indication on the value transfer that will occur as a result of the impending split.

“We anticipate the financial implications to be an estimated value transfer of approximately $25-50 million on an annualized basis from PayPal to eBay,” Swan said in the call with analyst.

On eBay Marketplaces, payment volume hit $15 billion, while gross merchandise volume declined 2 percent. Its marketplaces gained 2.1 million buyers in Q1, which was an 8 percent increase, to 157 million. Still, active buyer growth across its marketplaces business are down on the year but eBay said there are “signs that our business is stabilizing.”

Similar to eBay’s fourth-quarter earnings call, challenges in growing its core Marketplaces business were emphasized again as a key component to growth for the company. Leading the charge on that discussion with analysts yesterday was Devin Wenig, eBay Marketplace’s president, who will take over as CEO upon the eBay/PayPal split. While the fourth-quarter’s report about its marketplaces posted a disappointing quarter, Wenig indicated that new investments in adding upgraded search features that create a more seamless experience for both the buyer and the merchant will help its marketplaces business achieve the much needed growth from its core customer base.

“On the sellers’ side, eBay’s sweet spot is small and medium sized merchants and brands. They represent 70 percent of the global retail market, offering the diverse inventory and value our consumers are looking for,” Wenig said. “As a partner and not a competitor to SMBs, we intend to make eBay the global platform for them to grow and to thrive. We will offer improved seller tools, unmatched access to data and more balanced and predictable policies and standards. Consumer selling is another key eBay strength and we plan on revitalizing this segment of our market. …With simplified listing flows, predictive pricing data and higher touch intermediation for those that require it, we intend to make eBay the platform for consumers to buy and sell anything, anytime, anywhere.”

As for other sides of eBay’s platform, the future still remains unclear for eBay Enterprise as no update was provided from beyond what was provided in the company’s fourth-quarter earnings, when it was announced that eBay was “exploring strategic options for eBay Enterprise, including a sale or IPO.” eBay indicated that path was still moving forward, but didn’t indicate which of the options eBay Enterprise would head toward.