EBay's year-long slide appears to be nearing its bottom. The e-commerce company reported July 22 that second-quarter sales declined 4%, a less moderate drop than the ones eBay was experiencing a year ago. Earnings of 37¢ per share, excluding special items, beat Wall Street analysts' consensus estimate by a penny, though net income fell 29% compared with a year ago. While not spectacular, the results gave investors hope that the worst may be over for eBay ( (EBAY)), and that Chief Executive 's turnaround plan may be taking hold. Shares of eBay gained nearly 5% in extended trading July 22, after closing up 52¢, or 2.75%, at 19.45. "I knew the eBay turnaround was going to take over three to four years, and the first 18 months of a turnaround are always the hardest," says Donahoe in an interview. The former consultant laid out a long-term plan for the company when he took the helm early last year. His strategy includes shedding weak businesses and creating a one-stop online shopping site where buyers can bid in auctions, peruse classified ads, or buy products outright. "This is good, steady progress," he says of the second-quarter results. Donahoe: Changes Helped Earnings EBay has suffered from weak consumer spending, and merchants turning to other Web sites like Amazon.com ( (AMZN)) and for their transactions. Donahoe attributes the stabilization in eBay's business partly to changes the company has made to its e-commerce site, including improved search and the elimination of some fees it charged to put items up for sale. Early signs of a comeback in consumer spending have also helped. "In the last couple weeks of June we saw an uptick, and that uptick has kind of held," Donahoe says. Colin Sebastian, an analyst with , says the results are "encouraging both for eBay as well as ." Revenues for the quarter ended June 30 were $2.1 billion, compared with $2.2 billion a year ago. Net income was $327.3 million, vs. $460.3 million. Sales in eBay's core shopping business fell 14% to $1.3 billion in the second quarter, also a slower rate of decline than the previous year. "We've reached a point where the numbers have stopped getting worse," says analyst Jim Friedland. Growth at PayPal and Skype Revenues from PayPal, the online transaction business eBay acquired in 2002, grew 11% to $669 million. The business now accounts for nearly a third of eBay's revenues, and it's expanding into new areas including payments from mobile phones. EBay plans to announce new tools for outside developers on July 23 that will let them build applications incorporating PayPal payments. EBay also reported strong growth in Skype, the Internet phone service it plans to spin off in an initial public offering next year. Skype added 37.3 million new users, and revenues grew 25% to $170 million. Despite the early turnaround signs, analysts say eBay is still losing ground to Amazon. Since becoming more dependent on sales of goods sold at fixed prices rather than auctions, eBay has found itself in closer competition with the e-commerce king. EBay is "doing all the things they need to do to improve the platform, but the real challenge is that Amazon is also moving aggressively to make its platform better for buyers," says Cowen's Friedland. Case in point: Amazon on July 22 bought online shoe retailer for $847 million. Amazon's Edge In the first quarter of this year, the value of goods sold on Amazon in the U.S. increased 21% over the previous year; the value of goods sold on eBay in the U.S., excluding the poor-performing autos segment, fell 11%. During the second quarter, eBay's merchandise sales fell 8%. Amazon reports second-quarter earnings July 23. EBay is also likely losing Web traffic to Amazon. In June, eBay had 71 million visitors to its e-commerce site, a drop of 2.7%, according to market researcher ComScore ( (SCOR)). Amazon's traffic grew by 10.5%, to 63 million. In a conference call with analysts, eBay CFO pointed to the company's recent acquisitions of Bill Me Later, a credit processing service, and Gmarket, South Korea's top e-commerce site. He said both of these businesses will begin contributing to the company's bottom line by the end of the year. "You're starting to see the first bit of light at the end of the tunnel," says Jeffrey Lindsay, analyst with . "There's still quite a bit of tunnel yet, but at least it's not pitch black anymore."

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