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eBay Revenue Grows But Earnings Fall

eBay Earnings

While it's been painful at times, eBay (NASDAQ: EBAY) continues to press ahead in its efforts at a turnaround based on transitioning from an auction site to online liquidator.

It's at last seeing some indications of success, though the pain may not be ending anytime soon: The e-commerce giant posted third-quarter revenue slightly higher than analysts expected, but saw a 29 percent drop in earnings.

For the third quarter, eBay posted earnings of $349.7 million, or $0.27 a share, compared to earnings of $492.2 million, or $0.38 a share, for the same period last year -- a 29 percent plunge.

On a more positive note, revenue rose more than 5 percent to $2.24 billion, marking the company's first year-over-year revenue gain in 12 months.

Also, excluding charges and related financial items, the company said it would have earned $502 million, or $0.38 per share, for the recent period. Wall Street had been watching eBay with cautious optimism, predicting adjusted earnings of $0.37 per share on $2.14 billion in revenue, according to analysts polled by Thomson Reuters.

eBay attributed the year-over-year revenue growth to continued healthy performances by its subsidiaries PayPal, Skype and the company's classifieds business, as well as growth in eBay's fixed-price format.

"Our strategies are working," eBay CEO John Donahoe said during today's earnings call. "We are pleased with the pace, progress and performance we're seeing and the team is executing well against our three-year growth plan."

Weighing heavily in eBay's favor was its PayPal payments unit, which reported a strong quarter with $688.1 million in revenue, an increase of 15 percent from a year ago.

Net total payment volume (TPV) for the quarter totaled $17.7 billion, an surge of 19 percent, while active registered accounts reached 78 million, an increase of 19 percent year-over-year.

Skype contributed $185.2 million in revenue for the quarter, representing 29 percent year-over-year growth. The company's VoIP division -- which it's in the process of selling off and will retain a minority stake -- added 40.3 million registered users during the quarter, ending the period with 520.8 million registered users.

The company's marketplace division, which includes eBay.com, Shopping.com, StubHub, Kijiji and other related e-commerce sites, recorded $1.4 billion in revenue, a 1 percent decline from a year ago. Marketplaces net transaction revenue also declined 1 percent, but improved 13 points over the second quarter of 2009.

Still, the unit posted healthy numbers overseas, with international business accounting for 56 percent of Marketplaces revenue.

eBay saw signs of recovery in a key metric called gross merchandise volume (GMV) -- the value of all merchandise sold over eBay's site -- which jumped a better-than-expected 7 percent from the same period last year, to $12.2 billion.

"PayPal continues to gain share driven by strong global growth, with 66 percent penetration on eBay globally," Donahoe said. "eBay has stabilized, is showing positive trends, with core GMV accelerating for the second quarter in a row. And Skype is set on a path we believe will enable it to achieve full potential."

The third-quarter report marks a key milestone in the e-commerce giant's radical shift in strategy aimed at retooling the core marketplace from a digital flea market of collectibles to a fixed-price wholesaler.

That plan -- along with other dramatic changes -- has become one of the hallmarks of Donahoe's tenure since he took over the top spot in March 2008. While working to shepherd in a slew of policy changes designed to resuscitate the e-tailer's sagging performance, Donahoe's changes weren't always popular among eBay's regulars. Quite the opposite: Almost immediately, for instance, changes in eBay's selling policies came under fire from sellers and shareholders alike.

Chief among their complaints were a new fee structures and seller criteria guidelines, as well as the introduction of a vendor tier to support large retailers who wanted to move vast volumes of out-of-season and liquidated merchandise.

Now, however, Donahoe pointed to signs that things were looking up.

"Simply put, at eBay, we are seeing our turnaround efforts pay off," Donahoe said. "Core GMV is up, accelerating quarter over quarter, with fixed-price sales comprising 56 percent of GMV for the quarter. We're seeing more secondary market inventory with manufacturers moving merchandise at great value. Dell just opened up an eBay store and there's an online eBay outlet mall in Germany."

eBay first began signaling some measure of success in ending its slow decline in July, during the company's second-quarter earnings report. Earnings had still plunged 29 percent at the time, but sales still fared reasonably well. Additionally, GMV, while down, came in above what analysts had expected.

eBay's still far from being in the clear, however. In addition to continuing the company's shift away from a traditional reliance on online auctions, eBay is also facing lawsuits relating to Skype.

The lawsuits -- filed by Skype's original creators -- charge that eBay and Skype have played loose and fast with the license for the unit's core technology. Those lawsuits aim to stop the sale of Skype to private investors, in a deal that would allow eBay to retain a minority stake.

What's next for eBay?

While Wall Street had been warming to warm to signs of an eBay rebound -- the company's share price has seen a nearly 80 percent increase since the beginning of the year --projections for the fourth quarter appear to have stalled the mojo.

eBay said it's expecting adjusted earnings from $0.38 to $0.40 a share, with revenues of $2.2 billion to $2.3 billion, while analysts had been forecasting $0.40 a share and $2.57 billion.

Still, Donahoe talked up a number of areas of optimism for the company.

For one thing, he repeatedly confirmed during today's earnings call that eBay is confident the sale of Skype will be executed on time.

"Skype is a terrific business that stands outside of our core focus of online payments and e-commerce, and to maximize the potential for shareholders and for Skype, we have plans to sell it ... that deal is on track to close in the coming weeks," Donahoe said.

eBay also has big plans for PayPal -- analysts are bullish on its efforts to open up the platform in November, which could give it a shot at better capitalizing on efforts by third-party developers to bake it into their own applications and services.

Donahoe also said mobile will be a big focus for eBay in the future, adding that it plans to introduce an updated version of the eBay iPhone app, which he said has been downloaded 4 million times.

Update adds comments from today's earnings call.