EBay's Turnaround Is Taking Root

Second-quarter profits fell 29%, but CEO Donahoe is stabilizing the e-commerce company

By Douglas MacMillan

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 John Donahoe'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 Bain & Co. 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 Craigslist 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 Lazard Capital Markets, says the results are "encouraging both for eBay as well as e-commerce more broadly."

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 Cowen & Co. 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.

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