Internet

Good News from eBay


For each of the major negative signs in eBay's first-quarter results, there was a reassuring "but."

Sales fell 8%, to $2 billion, from a year earlier but were higher than estimates the company provided in January. Earnings fell 21% from the previous year, to 39¢ a share. But the profit figure beat Wall Street's expectations. "The company is indicating they are seeing that the economy doesn't appear to be getting worse, and that's going to create a lot of relief in the investor's mind," says Jim Friedland, an analyst at Cowen & Co.

The caveats indicate eBay Chief Executive John Donahoe may be making progress, however slowly, on an ambitious plan that would have eBay outperforming the e-commerce market by 2012. Early in his second year at the helm, Donahoe is gunning to revive growth by selling noncore businesses and focusing on sales of fixed-price items while reducing the site's emphasis on auctions. Shares of eBay (EBAY) rose 5.4%, to 15.58, in extended trading after the results were released.

Revenue from eBay's core shopping business fell 18%, to $1.2 billion, in part due to the strength of the U.S. dollar, said Chief Financial Officer Bob Swan. Transactions on the site, excluding the poor-performing autos segment, fell 16%.

Still, fixed-price sales are up 12% across the site, while auction sales fell 20%. "Every format we have except auctions is growing faster than e-commerce," Donahoe said on a conference call. Auctions make up less than a third of sales on the site, compared with 75% of the total two years ago.

PayPal Is Gaining Ground

Another bright spot in eBay's first-quarter earnings report: online payments business PayPal. That unit now represents 32% of the company's overall revenue and is being used by an increasing number of third-party e-commerce sites such as Sears, in addition to sellers on eBay. PayPal could eventually become more important to eBay than its core shopping business, says Collins Stewart analyst Sandeep Aggarwal. "There is no direct, strong competitor for that business," he says.

Moving away from auctions and becoming more of a traditional e-commerce site won't cure all of eBay's ills, however. One of Donahoe's biggest challenges is confronting the Amazon.com (AMZN) threat. Although eBay leads Amazon in online traffic, Amazon could soon overtake it; in March, 70 million visitors went to eBay's shopping site, down from 80.1 million the previous year, while Amazon lured 61 million visitors, up from 50 million, according to data provided by ComScore (SCOR).

Analysts applaud eBay's initiatives to increase the number of its sellers who offer free shipping, which is now around 30% of items sold on the site. "In this economic environment, with average order size going down, people become more sensitive to the shipping cost," Aggarwal says.

Skype on the iPhone

While eBay recently announced that it plans to spin off Internet-calling service Skype in an initial public offering in 2010, the business's first-quarter performance could entice a buyer sooner. The unit posted revenue of $153 million, up 6% from the previous year, and added 37.9 million users. CFO Swan pointed out that the new Skype application for Apple's (AAPL) iPhone and iPod Touch devices was downloaded by more than 1 million people in the first 36 hours of its launch and is now on 6% of those devices. "That is a very commendable number," Aggarwal says. "As a potential buyer, what could be a better sign than seeing such good traction?"

EBay estimated that it expects revenues to remain relatively flat in the current quarter and earnings to drop to 34¢ to 36¢ per share. Donahoe stressed that the company is focused on operating more efficiently, as well as diverting costs from sales and marketing into developing its products. "We're elevating the role of technology across our company to deliver more innovative user experiences," he told analysts and investors.

Analysts are still cautious. "This quarter does not mark the inflection point for a turnaround" in eBay's e-commerce business, says Colin Sebastian, an analyst at Lazard Capital Markets. "It's still a work in progress."

Douglas MacMillan is a staff writer for BusinessWeek in New York.

MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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