The Prophesy
Less than two months ago, a cosmic harmonic convergence took place. At its crystalline center sat QXL.com (Nasdaq: QXLC) , Europe's leading online auction site. On April 6, QXL split 3-for-1 (though the company calls it a 2-for-1 bonus issue). It had closed the previous day at a split-adjusted $22 on volume of 30,500. On that same day, an analyst from SG Cowen called QXL the eBay (Nasdaq: EBAY) of Europe and slapped a commensurate $333 price target on the stock. The next day it opened at $84.17, touched $117 during the day, and closed at $52 on 14.3 million shares traded.
The springboard for the comparison with eBay was the similarity between QXL's revenue from the quarter ending in December 1999 and eBay's quarter ending December 1997. The European market is lagging the U.S. by two or three years in terms of Internet usage, but it has 2.5x as many people. QXL looked to have even better prospects.
However, there was a problem. QXL didn't charge commissions on C2C (consumer-to-consumer) trades. Its gross margins were about 10.4%, whereas the eBay of two years ago achieved gross margins of 88%. While their revenues were the same, eBay was taking home about nine times as much gross profit. It also meant that eBay had $323,000 in operating income, while QXL lost $23.4 million. That's a significant difference.
The Present
QXL now trades at about $9.75. And they called Rasputin irrational.
The company reported its results for the fourth quarter and fiscal year today, giving investors the opportunity to re-evaluate the comparison to eBay. Net revenue from B2C (business-to-consumer) and C2C auctions totaled 2.18 British pounds ($3.5 million at the current exchange rate of $1.60 per pound, which I'll use throughout). From that, QXL derived $495,000 in gross profit. The company's operating expenses of $40 million brought net losses to $39 million. For the year, operating losses totaled $80 million. QXL will burn through its cash in 18-24 months and will have to return to the capital markets at that time, if they still can.
It's important to remember, though, that this is a growth period for QXL. The company realized $15.5 million in gross auction value, which is the total value of goods exchanged on the site. That's an 87% sequential increase over the third quarter's $8.4 million. The number of registered users shot up 50% sequentially to 681,000, and the number of items listed for sale jumped 123% to 2.9 million.
The Metamorphosis
QXL visited several changes on its business model this quarter that make the eBay comparison more apt. First, it has instituted commissions in the U.K. and says that it will add them in its other markets in the second half of this calendar year. U.K. commissions helped to improve gross margins this quarter to 14.2%, still well short of eBay.
Second, QXL has shifted farther away from B2C as a percentage of revenue, since about a third of B2C transactions require the company to incur inventory and fulfillment expenses. Here is the auction mix for the last three quarters:
Q2 Q3 Q4
B2C 54% 39% 30%
C2C 46 61 70
QXL is also expanding its reach through acquisition. On March 27, QXL offered to buy Bidlet, the leading online auction site in Sweden and a player in Norway, Finland, and Denmark. The move is key, since Scandinavia has the highest percentage of Internet users per capita in all of Europe. Bidlet will add about 200,000 users to QXL's base.
The Prospects
We'll have to see how these moves play out before we can anoint QXL as Europe's eBay. We'll also have to see how eBay's European ventures go. Right now it's hard to measure the competition, since eBay doesn't give out numbers for its German and U.K. sites. eBay Germany just began charging commissions too. Once all auctions become commission-based, usage may change. Competition from the likes of Yahoo! (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN) looms on the horizon as well.
For now, let's update the comparison. In the quarter ending in March 1999, QXL had $3.5 million in revenue. In the quarter ending in March 1997, eBay brought in $6 million. QXL's operating expenses rose to 11.5x revenue this quarter, up from 9.5x revenue last quarter. eBay, on the other hand, recorded operating margins of 28% two years ago.
The two companies don't seem to have the same aura.
See Also
