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Revenues Fall but eBay Still Tops Expectations

E-commerce giant eBay saw its revenues slip in the first quarter, but nonetheless turned in financial results that beat analysts' modest expectations.

After the market closed Wednesday, eBay (NASDAQ: EBAY) reported earnings of 39 cents per share on $500 million in net income, excluding one-time items. That figure was down from 42 cents on $560 million in the same quarter last year, but ahead of the 33 cents analysts polled by Thomson Reuters had been expecting.

Overall, eBay posted revenues just over $2 billion, down from $2.2 billion last year, but a tick ahead of the $1.9 billion analysts were expecting.

eBay attributed the declining revenues to a weakened U.S. dollar and the continuing macroeconomic climate that sapped sales in the company's core marketplace business, where year-to-year revenues dropped 18 percent. Nevertheless, President and CEO John Donahoe touted the company's performance at a time of flux in both eBay's business and the broader economy.

"We delivered solid Q1 results, exceeding expectations in a tough economy," Donahoe said on a conference call with analysts. President and CEO John Donahoe said in a statement. "The bottom line is that we're seeing a marketplace business in transition," he said, emphasizing the company's plans to refocus itself on its core e-commerce and payments businesses it outlined at its analysts' day in March.

eBay's payment services division, driven by PayPal, posted net revenues of $643 million, an 11 percent increase over the prior-year quarter. PayPal now accounts for 32 percent of eBay's overall revenue. In the meantime, the company said it is moving swiftly to integrate the Bill Me Later service it acquired last year.

At its analysts' day, eBay said it aimed to double PayPal's revenue by 2011. The company also detailed plans to move into a secondary retail market, snapping up unwanted inventory from retailers to sell on the Internet.

eBay has been flush with news recently. The company recently announced plans to spin off Internet phone service Skype in an IPO sometime in the first half of 2010. Analysts welcomed eBay's plans to shed Skype, a firm it acquired in 2005 for $2.6 billion but has proven a clumsy fit for the e-commerce giant.

Additionally, StumbleUpon, a Digg-like social recommendation site eBay acquired in 2007, recently said it was breaking away from the company to resume life as a venture-backed startup.

Three days later, eBay announced plans to pony up $1.2 billion to acquire South Korean online auction leader Gmarket. At its analysts' day, eBay identified the Asian market as a key driver of its future growth.

But to Citibank analyst Mark Mahaney, those moves are a sideshow compared to the fundamental problems facing eBay's primary business.

"In the core marketplace business, which is still north of 60 percent of their overall profits we haven't had a lot of major news," Mahaney said in a recent interview.

"What they need there is a lot of product innovation, probably some really aggressive moves to entice buyers to come back to eBay, and those buyers seem to be shedding away."

[cob:Special_Report]For more than a year, eBay has been rolling out incremental changes to it marketplace in an attempt to improve the experience for buyers. The company has tweaked its site's user interface, and enacted several policy changes aimed at promoting reliable, high-quality sellers, changes that have drawn considerable opposition from many of the merchants with stores on the platform.

"Buyers will continue to see improvements in trust, value and selection as we enter the holiday season later this year," Donahoe said.

But Mahaney warned that absent a major effort to shore up the company's marketplace business -- even something as drastic as abandoning the auction model that eBay was built on -- the company's "fundamentals could continue get a lot worse before they stabilize."

The quirks of eBay's e-commerce platform can at times put it at a competitive disadvantage against its principal rival Amazon, as well as traditional retailers that have established robust online stories, such as Wal-Mart and Target.

In the first quarter, sales of eBay's fixed-price listings increased 12 percent, while auction sales dropped 20 percent from last year.

"What I really want to sense is paranoia, frankly, out of the management team. I want to hear them address what's their core problem," Mahaney said.

On today's call, Donahoe was short on paranoia, but did acknowledge that eBay's e-commerce business would grow slower than the industry-wide sector throughout 2009. Next year, he said he expects eBay to perform in line with the industry, and outpace it in 2011.

"While we saw some signs of stabilization in the first quarter, we still have a lot of work to do," he said.

Shares of eBay were up 7.4 percent in after-hours trading.

Update adds comments from conference call with analysts.