Mark Main, Steven Hartley
eBay Q1 results: Is the honeymoon over for Skype?
Yesterday eBay announced its Q1 2007 results. Organic growth was 21%, leading to $1.77 billion revenues (up 27% from Q1 2006), operating income at $468 million and free cash flow of $479 million (up 6% year-on-year). An operating margin of 26.5% of income made the figures look healthy. Skype revenues grew 123% year-on-year to $79 million and registered users increased 107% from Q1 2006 to 196 million.Comment: At a top level the results look good and beat financial analyst expectations. However, as its core online marketplaces and spin-off PayPal payments segments grew, scratching beneath the surface revealed that although Skype grew, it is now facing much tougher competition.Although revenue growth has been steady at Skype, the operational data doesn't look as strong. Total user growth was impressive year-on-year at 107% but has been falling steadily for five quarters. Skype to Skype minutes increased just 11% year-on-year to 7.7 billion minutes and sequential growth showed just 1% growth on Q4 2006. Therefore, more users are spending less time using the system. Given that we estimate that approximately one sixth of users are regular users (at least once a week), there is now additional pressure to grow an active user base.Slightly surprising is that SkypeOut minutes were stagnant from Q4 2006 to Q1 2007 at 1.5 billion minutes. Although the Q1 2007 figure is 131% growth over the year this at first sight might appear to be a key concern as the service is a key revenue generator for the company. We have to assume that this metric excludes calls made under the new SkypePro service (which are probably 'unmetered') - if so it means that there has been some success in converting SkypeOut users onto flat-rate packages, but this only covers domestic calling. The standstill in SkypeOut minutes is also partly explained by last year's promotional activities in North America and Asia. In an attempt to increase usage outside of its European home market, free calls to Mobiles and landlines were offered. In Q4 this resulted in a 36% increase on SkypeOut minutes from Q3, a surge in growth on previous quarters. We will need to see further quarterly data to understand the trend rather better.Skype is now coming up against both traditional telcos and specialist VoIP providers and its rapid growth is diminishing. It reacted in January by announcing the SkypePro flat-rate package and a SkypeOut connection charge. We felt at the time that they were a necessary and shrewd move (see EuroView Daily, 19 January 2007). We expect Skype to make further moves to sustain revenue growth because with a long-term trend in growth of subscriber acquisition more effort must be made to monetise the existing user base. One possibility might be a broader SkypePro type of package for International off-net calls, essentially following the market trend of other VoIP players.
