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eBay Tops Estimates as Profits Plunge 29%

eBay Earnings
eBay continues to feel the sting from a sour economy, reporting second-quarter earnings ahead of Wall Street estimates but shy of its performance a year ago.

The company's second-quarter profits dropped 29 percent to $327.3 million, or $0.25 a share, from net income of $460.3 million, or $0.35 a share in the same period last year. eBay (NASDAQ: EBAY) also posted $2.10 billion in revenue, compared to $2.2 billion in the same period last year.

Before one-time charges, eBay posted a profit of $0.37 per share, a penny higher than analysts' average estimates of $0.36 a share on $1.99 billion in revenue, according to Reuters Estimates.

For the most part, eBay CEO John Donahoe indicated that he's sticking to the game plan he laid out in March. At the time, he detailed sweeping changes aimed at retooling the company's core e-commerce platform to favor fixed-price, liquidated inventory rather than auctions.

He also said at the time that eBay aimed to double revenue from its PayPal unit by 2011 and spin out its Skype VoIP unit.

"We're taking necessary actions and bold steps, but there's still a lot of work to do to achieve our three-year growth targets," Donahoe said during today's earnings call with analysts. "In e-commerce, we're improving trust, value and selection. We're growing classifieds. [Online sales] will grow with the [overall] e-commerce market in 2010, and faster than e-commerce in 2011. We're focused on where we can win."

He also reiterated his goal of doubling PayPay revenue by 2011, "and this week we'll be opening it up to third-party developers, which marks a significant step in fueling payments beyond what's involved in e-commerce," he added.

The results highlight eBay's difficulty in coping with a blistering economy while undergoing a transformation from an online auction site to a more traditional e-commerce platform focusing on wholesale and liquidation inventory.

The makeover is causing controversy in some quarters of the seller community as online merchants struggle to keep pace with policy changes and criticize the new management team for ruining a culture that formerly thrived on nurturing smaller e-tailers.

Meanwhile, several of eBay's other businesses continue faring well. The company's payments division, which includes Pay pal and Bill Me Later, proved to be a bright spot. The unit reported a strong quarter with $669.3 million in revenue, an increase of 11 percent year-over-year.

Net total payment volume (TPV) for the quarter was $16.71 billion, an increase of 12 percent. The revenue and TPV growth was driven by continued momentum in PayPal Merchant Services and the contribution made by Bill Me Later. Active registered accounts reached 75.4 million, an increase of 20 percent.

The division will continue to focus on the acquisition of new merchants, greater penetration into the Marketplaces business and the integration of Bill Me Later.

Donahoe said that eBay recently signed "70 large merchants, including Sears and K-Mart" to its Bill Me Later and Pay Pal programs.

[cob:Special_Report]"Fifty-four of the top 100 retailers offer Pay Pal or Bill Me Later," he said. "Twenty-two offer both."

The eBay chief also has high hopes for PayPal after the platform is opened to the developer community later this week.

"I think we'll see the beginning of an app innovation analogous to the iPhone," he added. "We'll see Pay Pal pulled into more and more apps and that's going to accelerate the pace and direction of Pay Pal."

Online classifieds revenue also increased 19 percent, while eBay also made strides in going global. Mirroring eBay's recent moves to expand overseas, the e-commerce firm said approximately 57 percent of Marketplaces revenue came from outside of the U.S.

Skype contributed $170.0 million in revenue for the quarter, representing 25 percent year-over-year growth. The VoIP unit added 37.3 million registered users during the quarter and ended the period with more than 480.5 million registered users.

In addition to growing its user base, Skype -- which eBay has signaled an interest in spinning off -- is focused on product strategies to enhance customer engagement, the company said.

Declines in eBay's core business

Things weren't as rosy over at the company's Marketplaces business unit, which consists of eBay, Shopping.com, StubHub, Kijiji and other e-commerce sites. The division recorded $1.26 billion in revenue, a 14 percent year-over-year decline.

eBay attributed the revenue drop to the impact of the stronger dollar and the impact of challenging macroeconomic conditions.

Overall trading was also down across eBay, with gross merchandise volume excluding vehicles totaling g$11.13 billion for the quarter, a decrease of 10 percent compared to the second quarter of 2008.

Executives tried to strike an optimistic note, however, saying that the Marketplaces division continues to make progress in stabilizing its core business, slowing its year-over-year decline in revenue compared to the prior quarter. In Q1, the unit saw an 18 percent drop in revenue from the previous year.

In a sign that eBay's seeing some success in its effort to concentrate on selling large retailers' second-season inventory, CFO Bob Swan reported that fixed-price growth rose by 19 percent year-over-year, while auctions declined 17 percent, which is still up 3 percent from Q1.

"We said in March we're focusing on the secondary market, new items -- branded in many cases, but out of season, one sales cycle old -- from wholesalers, manufacturers and retailers," Donahoe said. "They want to move deep SKUs, sell a lot of items quickly, and we're doing that by focusing on them as the 'deal of the day,' and they'll sell [6,000] or 7,000 in a couple hours, so we're pleased with the progress."

"The merchants like it," he added. "It's a good way to act on opportunities in the market."

For the third-quarter, eBay expects net revenues in the range of $2.05 billion to $2.15 billion with GAAP earnings in the range of $0.22 to $0.24 per share. On a non-GAAP basis, earnings per share will total between $0.34 to $0.36 -- in line with Wall Street estimates.

Update adds executive comments from today's earnings call.