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eBay Q3 Preview: Slow and Steady Wins the Race?

eBay Earnings
Investors will be watching tomorrow to see if eBay (NASDAQ: EBAY) is finally seeing some payoff from its efforts to transform itself from auction site to online liquidator.

Since CEO John Donahoe took the reigns in March 2008, the online marketplace has undergone a raft of policy changes -- many of which proved controversial among sellers -- that aimed to shift the e-commerce giant from a digital flea market of collectibles to a fixed-price wholesaler.

For industry observers, that strategy will be under the microscope tomorrow.

"eBay's Q3 will absolutely showcase the fruits of eBay's restructuring efforts," Colin Gillis, analyst at Brigantine Advisors, told InternetNews.com.

One key metric he'll be watching will be progress in transitioning gross merchandise volume (GMV) to non-auction transactions. GMV is closely followed analysts because it signifies the total value of all goods sold during the reporting period.

"I see 55 percent of GMV being fixed-price, which shows it's working, and if GMV shows 5 percent sequential growth, that would be fantastic," he said.

Success in weaning itself off of auction revenues could also have dramatic implications for other major names in e-commerce: For one thing, eBay still outperforms rival Amazon (NASDAQ: AMZN) in terms of sales volume, Gillis pointed out.

"People forget that more merchandise is sold on eBay than Amazon," he said. "What that means is that, by itself, margins eBay has as a community are much higher, and as revenue increases, it flows to the bottom line that much faster."

Tomorrow's report will show whether analysts' cautious optimism for eBay is on the money, as the company's Q3 projections are close to what financial firms have slated.

The company in July predicted earnings of $0.22 to $0.24 a share for Q3, or $0.34 to $0.36 when writing off certain charges, and $2.05 billion to $2.15 billion in revenue. Wall Street is expecting adjusted earnings of $0.37 per share on $2.14 billion in revenue, according to analysts polled by Thomson Reuters.

If revenue comes in above the $2.12 billion it reported for the same quarter last year, it will mark the first year-over-year revenue jump in 12 months.

Also, if eBay's numbers meet -- or beat -- the Street, it will likely play up the changes it made to the core e-commerce site, as opposed to focusing on subsidiaries PayPal and Skype as it did during investor calls following the first quarter.

Signs of a slow-but-steady comeback began surfacing during eBay's second-quarter earnings report in July. Earnings plunged 29 percent, but despite the decrease, eBay's sales still fared decently, and its dip in GMV had been less than what analysts had expected.

Making good on a transition in its e-commerce base isn't all eBay has to worry about: Tomorrow's earnings report will come on the heels of a bout of litigation surrounding Skype.

Earlier this year, eBay decided to sell a 65 percent stake in its VoIP unit to a private investment firm rather than spin it off through a public stock offering. Under the deal, the firm would pay $1.9 billion in cash for Skype, with $125 million to be paid later while eBay retains minority ownership.

However, the sale could be hampered by recent litigation with Skype's founders through their firms Joost and Joltid, which filed copyright infringement suits claiming that Skype violated a technology licensing agreement on core technology used in the service.

The most recent suit, filed after the sale was announced, also names the private investors as defendants, and seeks monetary damages in addition to a court order prohibiting Skype from using the core technology at issue.

eBay's other subsidiary, PayPal, may prove less of a headache: Gillis said he's optimistic about the company's plan to open the online payment service to developers.

"That's going to drive a lot of innovation in payments, all based on the PayPal backbone, so that's going to be interesting," he said. "But for now, what matters is getting the marketplace functional, and they're finally starting to match top sellers to buyers."