The Street Underestimated eBay

Forbes

The online marketplace beats views and wins back after-hours what it lost during the day.

 

 

EBay reported earnings per share of 40 cents, beating the consensus view of 38 cents per share. Revenue of $2.2 billion was up 6% and came in ahead of Street forecasts for $2.16 billion, according to Thomson Reuters.

In after hours trading, the stock was up 2.9% on the better than expected results. The company's stock lost 2.98% Wednesday going into the report.

Despite a positive second quarter, the company says a stronger dollar will have a negative year-over-year impact on the third quarter of $0.02 in earnings per share, says Chief Financial Officer Bob Swan in the company's earnings call. He said that he anticipates that European currencies will remain weak compared to the dollar and that the U.S. e-commerce market will be slow in the third quarter. "We are confident but cautious going into the second half of this year," says Swan.

EBay's full-year revenue estimate for 2010 is now between $8.8 billion to $9.0 billion, which would be a 9% to 11% increase compared to 2009.

eBay Plans to Take Skype Public
Story from the Wall Street Journal

EBay Inc. said it plans to separate its Skype Internet-phone business through an initial public offering, bowing to investor demands to unload a popular service that didn't fit well with its core business.

The IPO plans signal eBay couldn't find buyers for the business at a price that it liked. A group of private-equity firms recently teamed up to back Skype's co-founders, Niklas Zennstrom and Janus Friis, in an attempt to buy back the business, according to people familiar with the matter.

EBay, seeking to focus on its core businesses, will take the Internet-phone service public sometime over the next 14 months. Stacey Delo reports.

But the founders' offer fell on deaf ears, as it was well below the price at which eBay was willing to sell the business, these people said.

EBay declined to say how much it expects to raise by separating Skype, which had revenue of $551 million last year. EBay said it hopes to complete the IPO in the first half of 2010 and has hired Goldman Sachs Group to handle the offering. An eBay spokesman said the company plans to remain a shareholder after the IPO, but eventually will separate from Skype entirely.

The online-auction giant purchased Skype in 2005 for about $2.6 billion in cash and stock, on the premise that eBay buyers and sellers would use Skype's internet phone service to communicate. But two years later eBay took a $1.4 billion charge for Skype, reflecting the unit's shrinking value.

After John Donahoe became eBay's chief executive last year, he said Skype seemed to be a poor fit with the rest of the company. Shedding the business next year "will give Skype the focus and resources required to continue its growth and effectively compete," he said Tuesday.

The IPO market has been largely dormant since August, with just a handful of deals completed. Some bankers have said that they don't expect a meaningful pickup until the end of 2009 or early 2010, so scheduling a deal that far out could mean a better environment for a Skype IPO.

Christopher King, a telecom analyst with Stifel Nicolaus & Co., said investors who have been burned by other IPOs, like that of wireless broadband start-up Clearwire Corp. in 2007, might be hesitant to buy into Skype's offering.

"A standalone [Internet] telecom story would be a difficult sell for telecom investors in this environment," he said. "People are a bit skeptical of uncertain business models." He said Skype's name recognition is an asset, but said the company would likely end up with a valuation far less than the $2.6 billion eBay paid.

Skype uses a technology called voice over Internet protocol, which treats calls as data like email messages and routes them over the Internet, rather than a traditional phone network.

Skype's software, which can be downloaded free, allows users to call other Skype users on computers or certain cellphones for free. Skype users can also call land lines for a fee, typically 2.1 cents a minute, and conduct video calls. EBay says Skype has more than 400 million users.

Skype has an ongoing intellectual property dispute with its founders, who license a peer-to-peer technology to the company. An eBay spokesman said the company would resolve the dispute before an IPO.

Under Mr. Donahoe, eBay has moved away from the acquisition strategy of former chief executive Meg Whitman, and re-focused on its roots in e-commerce. On Monday, it also sold its stake in Internet company StumbleUpon back to its owners.

"Separating Skype will allow eBay to focus entirely on our two core growth engines -- e-commerce and online payments -- and deliver long-term value to our stockholders," said Mr. Donahoe.

eBay Retreats From Web Retailing
As Originally Posted at The Wall Street Journal

EBay Inc., a onetime Internet star that thrived with its pioneering auction model, is retreating from its strategy of competing across the board in online retailing as it contends with its own missteps and changing consumer behavior.

EBay Chief Executive John Donahoe told analysts Wednesday that the San Jose, Calif., company plans to focus its online-marketplace business on used and overstocked goods, rather than on the retail market for new goods that is dominated by competitors such as Amazon.com Inc.

EBay's visitor traffic fell over the recent holiday season and the company reported a 16% drop in fourth-quarter revenue for its marketplace business. The online-marketplace business constitutes about half of eBay's $8.5 billion in annual revenue.

EBay's focus on its "secondary market" includes the used and vintage goods that the company is already known for selling, as well as clearance and out-of-season items. The move is a shift from just a few years ago when eBay developed sites such as eBay Express to sell new goods, and when many in the retail industry expected eBay to dominate all forms of online commerce.

"We aren't a retailer," said Mr. Donahoe, who took over as CEO from Meg Whitman early last year. "We're going to focus where we can win." Mr. Donahoe valued the global market for secondary-market goods, online and otherwise, at $500 billion a year.

EBay spent Wednesday trying to persuade analysts that it is no longer just an online auction company and that its greatest hopes for growth rest in PayPal, an online payment company it acquired in 2002 that is able to benefit from overall growth in e-commerce, not just sales on eBay's sites. It announced a deal with Research In Motion Ltd. for PayPal to become the exclusive payment method for the application store on BlackBerry smart phones.

Still, the move amounts to an acknowledgment by eBay that it can't compete with Amazon and other e-commerce companies that represent the online equivalent of a shopping mall. Instead, eBay is returning to its roots as the Web's flea market by focusing on used and overstocked items, albeit with an effort to rethink the classic eBay shopping interface that has grown stale in recent years. EBay had taken off as an early leader in e-commerce in the late 1990s with an auction model that guaranteed consumers could find the best price on many used and leftover items.

But in the last few years, eBay has been felled by a shift in consumer behavior as shoppers revert to the buying habits that were familiar in the pre-Internet era. Before the Web, typical consumers preferred going straight to brand-name stores selling new goods, with the best customer service, to purchase the latest goods. The growth of malls across the nation reflected this preference; flea markets and thrift shops were a small sliver of commerce.

For a while, eBay appeared to cause a blip in that behavior, as new online consumers went to its site to snag deals by outbidding other people. But as the novelty of online auctions wore off -- and as the demographic of online shoppers broadened beyond the adventurous "early adopters" -- consumers began defaulting to huge online retailers like Amazon.com, Buy.com and Wal-Mart.com to buy their items. EBay, too, began shifting its focus to fixed-price sales but wasn't able to keep up with the competition on mainstream retail items.

EBay also is dealing with its own fumbles, many under the leadership of Ms. Whitman, the former CEO. The company rested too long on the laurels of its auction business, even as rivals like Amazon built their online retail offerings. EBay later tried to diversify into other areas for growth, purchasing Internet telephone service Skype Technologies SA for about $2.6 billion in cash and stock in 2005. But the deal didn't result in major revenue or customer growth. EBay later took a write-off on the acquisition, and there has been speculation the company wants to sell Skype. EBay has declined to comment on the speculation.

In addition, eBay is being hurt by the recession. As consumers searched for online deals during the recent holiday shopping season, many gravitated to Amazon.com, which experienced a big jump in visitor traffic and posted a record holiday quarter. But eBay -- which had benefited in the dot-com bust and economic slowdown earlier this decade when many consumers dumped used goods for sale on the site -- saw a drop in traffic, according to figures from comScore Inc.

EBay has been scrambling to reverse its slowing growth. After Ms. Whitman retired last year, her handpicked successor, Mr. Donahoe, made a series of changes. These included emphasizing fixed-price sales and giving preference to merchants who get positive customer ratings.

But the changes have yet to pay off. EBay reported its first-ever quarterly revenue decline, 7%, in the fourth quarter as profit fell 31%. Increasingly, eBay has relied for growth on its nonmarketplace businesses, such as its PayPal unit, which has doubled in revenue over the past 18 months.

EBay's emphasis on the secondary market is an "attempt to differentiate themselves from Amazon," said Scot Wingo, the chief executive of ChannelAdvisor Corp., a company that helps merchants sell across a variety of e-commerce sites, including eBay and Amazon. (EBay has a minority share in the company.) "It was an admission that they have a competitor out there that they previously wouldn't address," Mr. Wingo said.

An Amazon spokesman declined to comment.

As part of its sharpened focus, eBay Wednesday sketched out changes to its marketplace to help bring back shoppers who have migrated to other sites. The company said it is refining its search engine and developing a catalog of its products, which will let shoppers find what they're looking for more easily and choose from different colors or sizes of an item from a single page. EBay also is experimenting with new interfaces that enable shoppers to explore products via photos, based on similarities in color or style.

Such moves, along with growth at PayPal, should boost revenue to between $10 billion and $12 billion in 2011 from $8.5 billion last year, the company said. EBay executives said they expect operating earnings to grow by mid-single digits through 2011.

Still, the company predicted this year will be difficult. Its 2011 revenue goal and prediction that operating earnings would grow in the single digits "assumes that the global economy returns to some sense of normalcy," said eBay Chief Financial Officer Bob Swan.

Mr. Donahoe predicted PayPal will produce revenue of $4 billion to $5 billion by 2011, compared with $2.4 billion last year, and could become the largest portion of eBay's business.

EBay also warned that, as it makes changes to its marketplace, sales in that business will underperform that of other e-commerce companies this year. The company forecast its online-marketplace unit will generate $5 billion to $7 billion in revenue by 2011, suggesting sales could remain flat from $5.6 billion last year.

Mr. Donahoe didn't name companies that he had wooed into using eBay for secondary-market sales, but signaled that they might include some middle-market players that buy overstocked items in bulk. He said his company's "sweet spot is as much with intermediaries as with retailers."

Analysts were receptive to eBay's emphasis on the secondary market. "But it comes down to executing on them," said John Aiken, an analyst with Majestic Research. "If they can make the buyer experience incrementally better, there will be more buyers, and therefore more sellers."

A Not-So-Jolly Season for eBay CEO

For eBay Inc., this Christmas isn't turning out to be so merry.

In its first holiday season under new Chief Executive John Donahoe, eBay is suffering a slide in visitor traffic and deteriorating sales. Customers are leaving for fixed-priced sites where eBay has less of an edge, and because of continued problems with unscrupulous sellers.

Weekly traffic to the auction site fell 16% between Nov. 3 and Dec. 14 from a year ago, according to research firm comScore Inc. In contrast, Amazon.com had 6% more unique visitors during the same period.

The weakness is showing up in the sales of eBay sellers such as Gary Meyer. Mr. Meyer owns Gem Enterprises Inc. in Merchantville, N.J., which lists more than $300,000 in tech equipment such as printers on eBay. So far this holiday season, Mr. Meyer's sales on eBay are down 30% to 40% from a year ago, he says. "We've geared up our Web site more and started listing on Amazon.com and other venues," Mr. Meyer says.

Lorrie Norrington, president of eBay Marketplaces, declined to comment on eBay's holiday sales. She noted eBay was the most visited Web site on the Monday after Thanksgiving -- a popular online shopping day -- with a 45% increase in unique visitors, according to comScore.

"We are still three times the volume of the competition and driving hard to make aggressive deals in a tough environment," she says.

EBay performance this quarter could be a referendum on the changes Mr. Donahoe has made this year. Since taking over for former CEO Meg Whitman in March, Mr. Donahoe has sought to rev up growth and reclaim buyers who had stopped visiting the Web site.

His most significant move has been to make eBay less of an auction house and more like Amazon, Walmart.com and Sears.com, selling fixed-priced goods, which consumers now prefer for speed and convenience. Among other changes, Mr. Donahoe has cut the fee to list fixed-price items on eBay and boosted the fee charged when an item sells, a model that helps fixed-price sellers better set profits. Ebay does not offer Lawn Care.

Yet the changes have so far had little financial impact -- and have angered many loyalists. Transaction revenue per listing between October and the end of November plunged 28% from a year ago to $1.44, according to Majestic Research. Wall Street analysts now estimate the San Jose, Calif., company will post its first year-over-year revenue decline when it reports fourth quarter earnings next month. Seattle-based Amazon has forecast an at least 6% increase in fourth quarter revenue over last year.

"We haven't observed...any material positive changes on the buyers' side of the equation," at eBay, says John Aiken, managing director with Majestic Research.

Some long-time sellers say eBay's new fee structure has increased their costs and made unfair ratings more difficult to resolve. Under rules implemented by Mr. Donahoe, when buyers leave negative feedback, seller ratings are lowered and their future listings are pushed lower in eBay's search results.

The move to fixed prices has made its Web site confusing for buyers who have to navigate combined auction and fixed-price listings, say analysts and sellers. In September, eBay rolled out new search algorithms that mingle auction-search results with fixed-price results.

The technology changes have received poor reviews from sellers such as Debbie Imlay, a seller of women's lingerie on eBay. Ms. Imlay says many of Mr. Donahoe's revisions have made the site confusing to surf, turning off shoppers. "They are making it too difficult," says the Chatsworth, Calif., merchant.

Ms. Imlay, who sells over $3,000 a month in lingerie on eBay, says the site is moving to fixed-price sales too quickly at the expense of auctions. She says her customers want to purchase items for the lowest price and auctions are still the best way to get bargains. By staying with auctions, Ms. Imlay says she pays 15% more fees to eBay than she did before Mr. Donahoe's fee changes. Overall, she says her holiday traffic and sales on the site are down 10% from a year ago.

Ms. Norrington says "search is always a journey" but that eBay's search changes are intended to help consumers. She adds that eBay has "the right long-term strategy."

Some sellers do like Mr. Donahoe's changes. Jack Sheng, chief executive of Eforcity Corp., which sells electronic-accessories, says Mr. Donahoe understands the problems sellers are facing and has made the appropriate changes. Mr. Sheng forecasts Eforcity's holiday sales on eBay will be up around 10% over last year.

Mr. Donahoe has also attracted some large online merchants such as Buy.com and SmartBargains.com by working closely with them on volume discounts and giving them extra support.

One large auction-based seller, B&H Factory Outlet Inc., is now experimenting with fixed-price sales. The discount apparel company generates $800,000 a month in sales on eBay and plans to add up to 5,000 fixed-priced items to its eBay store next month. It will also offer free shipping on those items, something it doesn't do with auctions.

"We want to test both markets," says Stacie Sefton, B&H's CEO. Traffic to B&H's eBay store is up 25% this holiday season over last year, she says. B&H's average sale on the site is down 29%, which she attributed to the economy.

Of course, this holiday season has been particularly difficult because of the economic downturn. In response, eBay has offered a record number of holiday promotions, including $1 doorbusters for items such as toys and sporting goods.

Last month, eBay also teamed up with Microsoft Corp. to offer shoppers up to 30% off purchases of select fixed-price items when they land on eBay through Microsoft's search Web site. The promotion ended Dec. 17.

But such changes haven't been enough to lure back buyers including David Anderson of Bakersfield, Calif. The 28-year-old said the few times he tried to buy photography gear on the site he has been outbid in the final minutes of an auction. "It's just frustrating," he says.

Mr. Anderson says he hasn't shopped on eBay since February, preferring a more traditional online buying experience. "It was fun 10 years ago, but now I want to get my product and go," he says.

EBay's Auction Arm, PayPal Drive Net

Titan Faces Challenges With Slowing Growth At Flagship Business

EBay Inc.'s first-quarter profit climbed 22% and revenue increased 24%, propelled by its flagship online auction business and its Pay Pal electronic-payments unit.

The San Jose, Calif., company also raised its forecast for 2008 revenue and earnings, surpassing Wall Street estimates. EBay expects revenue for the full year in the range of $8.7 'billion to $9 billion, up fr9m the mean forecast by analysts surveyed by Thomson Financial of $8.79 billion. EBay also said it expects earnings, excluding items, of $1.70 to $1.75 a share.

The report marks John Donahoe's debut as chief executive of eBay and the first since he introduced in February big structural changes-such as better customer service and a different fee structure-aimed at rejuvenating the company's flagship auction site. While those policy changes helped somewhat to generate higher revenue, the company said revenue growth in its main auction business unit was driven primarily by advertising, elassifieds and the online-ticketing unit Stub Hub, rather than by expansion in core auction sales.

Revenue exceeded Wall Street's forecast of $2.07 billion and surpassed eBay projected range of $2 billion to $2.05 billion.

While revenue from the flagship auction business rose 19% to $1.48 billion and new listings rose 10%, eBay's active users rose 1%, its slowest-ever growth rate.

The revenue growth rate is down from 23% a year earlier. And early feedback from merchants offers a mixed picture of how the changes are affecting them; some sellers are concerned that buyers haven't returned to the site.

"The noncore businesses performed better but there are certainly challenges in the core [auction business]," said Jeetil Patel, a Deutsche Bank Securities analyst.

The company's PayPal electronic-payments unit had a strong quarter. Revenue rose 32% to $582 million as PayPal did more business with merchants such as JetBlue Airways Corp. Skype, eBay's Internet-calling business, generated revenue of $126 million, up 61%.

Ebay's forecast for the current quarter, which ends in late June, essentially matched analysts' expectations. The company said it expects revenue in the range of $2.1 billion. It projected earnings, excluding items, of 39 cents to 41 cents a share.

Thousands stuck with fake art prints

CHICAGO (Reuters) - Take a second look at that signed Picasso print you bought on eBay.

A ring of art counterfeiters has sold thousands of prints since 1999 bearing the forged signatures of Picasso, Miro, Dali and other famous artists to buyers around the world.

"Thousands of people will learn they ... bought a fake," said Chicago-based U.S. Attorney Patrick Fitzgerald, who announced indictments on Wednesday charging two Americans, a Spaniard from Barcelona, and two Italians from Milan and Monsummano with multiple counts of fraud.

U.S. authorities will seek to extradite the Europeans.

Sale prices ranged up to $50,000 for counterfeit prints that came with forged artists' signatures and fake certificates of authenticity that were sold in galleries, at art shows and through Internet auction site eBay, Fitzgerald said.

The counterfeits were produced in Spain and Italy, with the volume of fakes such that two of the alleged conspirators warned another one not to flood the market.

While buyers are stuck with the bogus works, prosecutors offered a Web site where they can provide details of how they were scammed: www.usdoj.gov/usao/iln.

Story published on Yahoo! News, March 21, 2008.