EBay Profit Drops After Acquisition Costs Eat Into Earnings

EBay Inc. (EBAY), the world’s largest online marketplace, reported a drop in second-quarter net income and forecast lower-than-anticipated earnings, a sign its acquisition spree is weighing on profits and margins.

Excluding some costs, third-quarter profit will be 46 cents to 47 cents a share this quarter, the company said today in a statement. That missed the 48 cents projected by analysts, according to Bloomberg data.

Chief Executive Officer John Donahoe, leading a turnaround of the company, has made at least nine acquisitions in the past year to expand into new businesses. Costs tied to the $2.4 billion purchase of GSI Commerce Inc., announced in March, cut into net income. Still, EBay’s PayPal business surged last quarter, and Donahoe’s comeback plan showed signs of progress, said Colin Gillis, an analyst at BCG Partners in New York.

“It wasn’t a blowout,” he said. “It’s nice, steady, incremental improvements.” Gillis recommends buying shares of EBay, which he doesn’t own personally.

EBay fell 47 cents to $32.70 in extended trading after the report. Shares of the San Jose, California-based company, which have climbed 19 percent this year, closed at $33.17 on the Nasdaq Stock Market.

In-Store Payments

EBay forecast third-quarter sales of $2.85 billion to $2.95 billion, topping the $2.71 billion estimated by analysts.

Future growth may be driven by in-store payment products, which EBay is testing with retailers this year, Donahoe said in an interview. The company plans to roll them out to more merchants in 2012.

These products may include the ability to pay with wireless systems, such as near field communication, or NFC, a technology that lets phone swipes take the place of credit cards.

“PayPal will work with all NFC-related systems,” Donahoe said. “Retailers are pulling PayPal into their stores, because they realize their consumers want a seamless experience.”

EBay’s main e-commerce site, meanwhile, has continued to lose ground to Amazon.com Inc. (AMZN) -- even after the company revamped its search engine and lowered listing fees for sellers. In June, it drew 65.5 million visitors in the U.S., a drop of 2.3 percent from the previous year, according to Reston, Virginia-based research firm ComScore Inc. (SCOR) Amazon increased its visitors 26 percent to 95.8 million.

Tighter Margins

Margins in the e-commerce business have narrowed because of acquisition costs, EBay Chief Financial Officer Bob Swan said on a conference call with analysts.

PayPal remains one of the biggest sources of growth for EBay, with revenue from the division rising 31 percent to $1.07 billion last quarter. The unit accounts for 39 percent of EBay’s sales and eventually will be larger than the company’s e- commerce sites, Donahoe has said.

“There’s two things that make PayPal work: the number of users and the frequency of users,” Gillis said. “When you have both levers working, that’s a great thing. It’s slowly creeping up to becoming half the company.”

Second-quarter net income fell to $283.4 million, or 22 cents a share, from $412.2 million, or 31 cents, a year earlier. Expenses from the GSI deal, which EBay is using to build ties with big retailers, crimped profit in the period. Sales climbed to $2.76 billion, compared with the $2.61 billion predicted by analysts.

Zong Acquisition

EBay is adding to its stable of mobile-payment services with the $240 million purchase of Zong Inc., a deal announced this month.

The mobile-payment market is an increasing focus for EBay as rivals such as Google Inc., Visa Inc. and Square Inc. roll out their own programs. EBay’s purchase of Zong, a startup that lets users charge online purchases to their wireless carrier bills, could help PayPal compete in the emerging market for transactions made on the go, said Ken Sena, a New York-based analyst at Evercore Partners.

“PayPal is positioned well when you pay for things in a store using a mobile phone,” said Sena, who doesn’t own shares of EBay and has an “equalweight” rating on the shares. “For investors, it’s a reason why they want to own EBay.”

Active Users

PayPal will process more than $3 billion this year on mobile devices, up from just $750 million last year, the company said. The service now has more than 100 million active user accounts.

In May, EBay said it had posted a $1.4 billion return on its original investment in Skype Technologies SA after Microsoft Corp. agreed to purchase the video-calling service for $8.5 billion. Former EBay CEO Meg Whitman led the acquisition of Skype for $2.6 billion in 2005. Two years later, the company wrote down its value by $900 million. Donahoe sold 70 percent of the service to investors in 2009, a deal that valued Skype at $2.75 billion.

EBay was founded in 1995 as an online auction site. After auctions fell out of favor with many Internet users, Donahoe began steering the company toward fixed-price listings. EBay also owns StubHub.com and Shopping.com.

To contact the reporter on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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