RealTime IT News

eBay's Woes: Going, Going, Gone?


Online auction powerhouse eBay today showed impressive first-quarter results, evidently proving successful in shrugging off a series of changes that some industry watchers had feared would cut into the company's growth.

eBay (NASDAQ: EBAY) posted first quarter revenue of $2.19 billion, a 24 percent increase from the same period a year earlier. The quarter's take led to a net income of $460 million, or $0.34 per share -- above previous guidance on both accounts.

Minus one-time charges, the company's quarterly income would have totaled $0.42 per share, it said -- topping analysts' $0.39 per-share estimates, according to Thomson Financial.

Company executives credited the strong performance to 19 percent growth in net revenues from eBay's Marketplaces unit, which alone accounted for $1.5 billion in revenue.

eBay also pointed to expansion in its PayPal and classified ads businesses. PayPal delivered revenues of $582 million, up more than 30 percent from the same period last year, while classified revenue grew 60 percent.

Closely watched Skype likewise contributed to the strong quarter. eBay's Voice over Internet Protocol (VoIP) unit reported $126 million in quarterly revenue, a 61 percent growth from the first quarter of 2007.

The numbers may go some way toward mollifying the many critics who view the September 2005 acquisition of Skype as eBay's greatest misstep.

Company executives said Skype registered 33 million new users during the quarter, raising its user base to more than 309 million -- a fact that makes it the largest of any of eBay's businesses in terms of usership.

In addition to demonstrating strength in several of its businesses, eBay also gave some indication that the current gloomy economic climate did little to dampen its performance.

In part, the company attributed this fact to its global footprint, which it said helped to insulate it from weakness in the U.S. market.

Operating margins decreased to 25.2 percent, down slightly from the 26.5 percent it reported during the same period last year. eBay attributed the drop to a larger focus on faster-growing, but lower-margin businesses -- such as PayPal and Skype.

"This was a very strong financial quarter for the company," said John Donahoe, eBay's president and CEO. "The results reflect the strength provided by our diverse portfolio of businesses. Our stability and growth continues to give us the confidence to make innovative changes to our products to keep customers engaged for years to come."


Several factors made eBay's first-quarter earnings of special interest to industry watchers. The e-commerce bellwether has been in a transitional period, with longtime CEO Meg Whitman having recently turned over the reins to John Donahoe -- a move that accompanied a wider executive realignment.

Upon his appointment as Whitman's heir, Donahoe made it clear that his first order of business would be to ensure long-term growth by improving the buying experience on eBay.

His strategy involved a set of controversial new policies, slated to take effect throughout 2008. But the plans, which entailed fee realignments and protecting buyers from negative feedback, alienated many of eBay's Power Sellers, who have since organized a series of boycotts to protest the moves.

The fallout from the rule changes provoked a wave of speculation among industry observers that eBay's heretofore unique market position was in jeopardy, with a host of smaller exchange sites courting dissident sellers.

In an uncommonly grim March SEC filing, eBay warned of numerous risks to its business, underscoring the potential difficulty it anticipated in retaining existing customers.

Despite the complaints from sellers, Donahoe said the company's focus on buyers was serving it well.

"What is good for buyers is ultimately good for sellers," Donahoe said during today's earnings call. "This successful balancing of the ecosystem is what makes for a healthy ... marketplace."

Additionally, eBay continues efforts to streamline the business, albeit through less-dramatic changes. Earlier today, the company announced that it would pull the plug on its Live Auction business at the end of the year.

The seldom-used feature mirrored a real-world auction, where people bid in real time, and the transaction closes as soon as bidding stops, unlike the more popular auctions that last for a preset time.

In addition to continued resistance from sellers, eBay also may face negative impact from ongoing legal actions. However, it took an important step forward on that front with the settlement of the longstanding patent-infringement dispute with MercExchange, which charged that eBay had misappropriated the technology behind its Buy It Now feature.

Nevertheless, eBay's legal worries are far from over. A judge in a District Court in New York's Southern District is considering a ruling in a trademark-infringement lawsuit brought by Tiffany & Co., charging that eBay failed to adequately patrol its marketplace for fake goods.

Similar cases involving luxury brands such as Rolex are pending in Europe. If eBay were found to be responsible for inspecting all the name-brand merchandise in its marketplace, it would eat into its profit margins and potentially disrupt its business model.

Skype, too, appears to be pulling more of its own weight. The company had shown some buyer's remorse in its purchase of the VoIP, most acutely in October, when it had to eat a $1.4 billion write-down to close the deal.

During its previous earnings call, Whitman called Skype an "extremely successful four-year-old."

Similarly, in eBay's latest earnings call, Donahoe continued to praise the unit: "More people than ever are using Skype to stay connected with friend sand family across the world."

Still, many may continue to wonder what an e-commerce company is doing with a VoIP provider, and rumors have persisted that eBay is in talks with Google about either a partnership around the division or an outright sale.