eBay Enterprise - Opportunities Exist

| About: eBay Inc. (EBAY)

eBay, Inc. (NASDAQ:EBAY) is a commerce company well known for its online marketplace that provides both fixed price and auction style transactions, and also for PayPal, its fast-growing payment solutions service. The company reports its performance under three broad segments; Marketplace, Payments and GSI Commerce. Since Q2 2013 GSI has been re-branded as eBay Enterprise and accounted for approximately 5.5% of the company's net transaction revenue at $185 million, as of September 2013. Being a smaller and relatively newer segment it is somewhat less talked about than the other two, but is nonetheless an intriguing aspect of the business. My article today will focus on eBay Enterprise and try to evaluate its potential as a business driver for the company.

Business & Recent Performance: eBay Enterprise offers e-commerce, marketing and omnichannel services to major retail brands. It provides a web platform that includes services such as site management, shopping carts, shipping and online marketing, among others. eBay enterprise was born in 1999 as Global Sports Inc., an e- commerce platform for sporting goods that expanded its partnerships to several other retail categories over the years. By the time it was acquired by eBay in 2011 its revenue had grown at a compounded annual growth rate of nearly 65% from $5.5 million in 1999 to $1.4 billion in 2011. Since the acquisition eBay has integrated and re-branded nine companies into eBay Enterprise that add marketing, search, mobile messaging and email among other capabilities to its managed services portfolio.

Enterprise segment clients experienced same store year over year sales growth of 13% in Q3 2013, which was slower than the 19% growth rate in the previous quarter. Revenue was up 5%, offset by a lower take rate, client and channel mix and the impact of consolidating and re-branding the various businesses into eBay Enterprise. Margin growth also slowed due to lower rates and business mix. Cost of revenue as a percentage of revenue was higher for the Enterprise segment as compared to the other two reported segments of the company. The company began migration of its business clients to a new suite of Commerce Technologies and continued to leverage PayPal to improve the performance of its Enterprise platform.

Competition: The Enterprise segment faces intense competition from other commerce and technology companies like Amazon (NASDAQ:AMZN). The business customers it seeks to gain could opt to develop and use in-house e commerce platforms instead of partnering with the company.

Appeal to Potential Clients: Given the availability of alternatives mentioned above, the question is what would prompt brands to become clients? There are certain benefits that eBay Enterprise brings to the table.

Integrated Commerce Solutions: eBay Enterprise supports its retail partners in engaging a customer who utilizes various channels such as mobile, desktop, television, brick and mortar, and more, to shop. This is a customer empowered by technology who expects personalized customer service, consistent experience across channels and easy, secure transactions. One of the reasons an Enterprise partnership could be appealing to potential retail clients is because it promises holistic start to finish solutions for maximizing customer engagement. It takes the task of identifying and implementing the various technologies, delivery, distribution, supply chain, packaging, customizing, customer care, marketing and other solutions from its business clients and offers them an integrated ecosystem.

Customer analytics is another valuable service that eBay Enterprise can offer its partners. It can utilize data from specific clients and general commerce trends from its marketplace and payments portals to provide actionable insights to businesses. For example, it can help identify trends such as shift to mobile by recording a 127% growth in mobile orders for its partners between Thanksgiving 2012 and 2013, and assist in tailoring their strategy to take advantage of changes in customer behavior.

Strategic Alliances: Through its network of partnerships and suite of services the Enterprise segment can provide wide global exposure and economies of scope that may not be accessible to a retailer individually. It owns 3 million square feet in fulfillment centers including locations in the United Kingdom and Canada.

It has formed an Alliance Network with key partners to bring together a suite of services that customers can utilize to sell their products and build their brands. For example, it partnered with Ordergroove to provide subscription commerce solutions to its clients like Grainger, Teavana and L'Oreal to name a few. Engaging customers in a subscription service can be instrumental for retailers to attract and retain clients at a lower cost, up-sell and cross-sell products and services and achieve more frequent transactions. It also formed a partnership with Mercent to offer analytics and marketing solutions to its clients.

Omnichannel Retail: The enterprise solution can be of value to retailers in providing a seamless experience to its customers across various media. It seeks to assist brands in leveraging their existing assets like brick and mortar stores with the help of technology to maximize sales. For example, setting up tools such as tablets or kiosks in stores with databases of inventory, that sales associates can rapidly scan, and order items for customers from any store in their network.

Another useful feature for retail clients can be supply chain solutions that enable items to be easily located and shipped among all of their stores that are connected on an integrated network. One such service is provided by eBay Enterprise through its partnership with VendorNet that allows deliveries to be routed to the optimal point of fulfilment and is used by clients such as Juicy Couture, Toys R Us and National Geographic.

Advantage to eBay, Inc.: While currently the enterprise segment contributes a small percentage to total revenue of eBay, Inc., it presents some potential advantages for the parent company.

Diversified Client Base: Having a diversified portfolio of customers can be a good hedge against volatility for any company. Within the retail industry eBay Enterprise serves over 1000 brands and retailers from a variety of sub sectors like Apparel, Beauty, Sporting goods, Toys, Consumer Electronics, Entertainment Media , etc. Some of its retail partners are popular brands such as Aeropostale, DKNY, Kate Spade, Babies R Us, Dick's Sporting Goods, NBA, Radio Shack, PBS and Godiva to name a few. Recently in Q3 2013 it added Sony to its list of major Enterprise clients. In 2012 Enterprise partners recorded approximately $4 billion of transactions.

Conversion and Cross Sell: In Q3 2013, eBay Enterprise set up a test that provided free two-day shipping to customers who used PayPal when shopping with nine of its retail clients. Its analytics data showed that free shipping was the most popular promotion this holiday season among its Enterprise partners. This is an example of how the company can leverage its various assets to cross sell its different services. Not only is there the opportunity for PayPal to gain from handling transactions for Enterprise clients, there is also the prospect of driving these clients towards opening stores on the eBay marketplace forum.

Overall: eBay Enterprise is a business that needs to constantly maintain superior technology, customer support and innovative partnerships for survival and growth. The services it provides are not unique and it faces competition from both service providers as well as in-house marketing and technology departments of retail brands. However, it does have the opportunity to identify gaps in the retail market through data from existing partners and effectively use that information to grow the business for itself and its clients. As long as eBay Enterprise stays on track with quality and innovation it could prove to be a valuable asset for the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a self-taught individual investor and this article expresses my views based on my own research. I am not being influenced or paid by any organization to write this article.