eBay: Holding Firm, for Now

The online auction site's third-quarter earnings just beat expectations,but can it live up to 2007 forecasts?

Ebay turned in stronger-than-expected third-quarter earnings on Oct. 18, exceeding Wall Street expectations, thanks in large part to its PayPal acquisition and fast-growing newer initiatives such as Shopping.com. The online auction and e-commerce site reported a 31% surge in revenues, to $1.45 billion, compared with the same quarter last year. Analysts were expecting roughly $1.43 billion. Meanwhile, net income increased 10%, to $280.9 million. Contributing to the top-line growth was a 41% jump in revenues, to $350 million, at the company's online payment business, PayPal.

Ebay (EBAY) CEO Meg Whitman told BusinessWeek that she is pleased with the company's performance for the quarter. "I'd say we're exactly where we expected to be. We delivered at the high end of revenue guidance," says Whitman. "All three of our businesses exited Q3 with some very good strength. September was a particularly good month for all three businesses, and I think we feel pretty good about where we stand."

During a conference call with investors and analysts, eBay CFO Bob Swan said that the company expects the fourth-quarter holiday shopping season to be a strong one, with net revenues of $1.62 billion to $1.68 billion.

Despite the solid results, however, there is reason for concern. The company now says that it is expecting growth of 17% to 21% in 2007. Wall Street had been forecasting a sharper increase for next year, of about 25%.

Auctions vs. Stores

One issue eBay is struggling with is encouraging more store owners to offer items for auction, rather than for direct sale in eBay stores. In recent years, stores listings, which sell for a fixed price, have been increasing relative to the auction listings that the company is famous for. This poses a problem for eBay because stores pay significantly less to post listings, and store items typically don't sell as fast as auction items, if at all.

Though stores pay a larger up-front fee and commission on sales, eBay ends up earning less on store commissions than on auctions—and, worse, its site can spill over with stagnant inventory. The clutter may even be driving some customers away. "Sellers were using store listings to dump a ton of inventory on the system very cheaply," explains Tim Boyd, a research analyst at Caris & Co. "An item that they normally would have sold as an auction item they were sticking in their stores."

Analysts had hoped that the mix of auction to store listings was increasing in eBay's favor this quarter, meaning more revenue. However, of the 584 million new listings eBay received during the quarter, 95 million, roughly 16%, were store inventory listings. That's up from 11% of listings from stores in the third quarter of 2005.

"Cautiously Optimistic"

To increase the number of core auction listings, the company raised fees for stores and implemented other actions. Most changes were initiated late in the quarter, at the end of August and the beginning of September. Whitman said the company expects to see more results later in the year. "You're starting to see an increase in the percentage of core listings relative to the total," she says.

Whitman sees signs of improvement in the mix in an increase in auction items that are actually selling on the site, as opposed to just being listed. "We believe [that] means the buyer experience is improving again," says Whitman. "So we are cautiously optimistic that the initiatives we took in Q3 will in fact have the intended effect."

The store price increase did—expectedly—cause some store owners to close up shop. CFO Swan said that the total value of merchandise sold on eBay's sites increased a modest 17%. "We indicated we had some rebalancing to do, and we told the market we didn't expect to see too much benefit until we got into the fourth quarter," says Swan.

During the call, Whitman and Swan discussed partnerships with Yahoo! (YHOO) and Google (GOOG). In May, eBay announced that Yahoo would provide graphical ads on eBay sites (see BusinessWeek.com, 5/25/06, "eBay-Yahoo Deal: Less Than Meets the Eye?"). As part of the deal, Yahoo agreed to allow customers to use PayPal for goods and services purchased from Yahoo or the Yahoo network of sites. Whitman said on the call that eBay sees the ability to use PayPal on Yahoo as strategically important in terms of visibility for PayPal. Yahoo and eBay are also exploring the possibility of deploying a "click-to-call" button on their sites that would involve Yahoo! Messenger with Voice and Skype users.


Ebay's deal with Google, announced Aug. 28, is similar to the earlier Yahoo agreement. Instead of providing graphical ads, Google will place search-related text ads on some of eBay's sites. The two companies also plan to launch a click-to-call button that would allow consumers to contact the sellers of Internet goods via Skype and Google Talk. Whitman says a joint pay-per-call service with Google would become a focus in the second half of 2007.

Both deals have positive implications for Skype. The idea is that there could someday be click-to-call-Skype buttons next to most online local advertising and classified listings. Consumers would be able to search for a product on eBay, Google, Yahoo, and other sites and then, once they find what they want, contact the seller directly via Skype. They could immediately ask questions about anything from the terms of the sale to particular questions about the merchandise. Skype buttons are currently available on some eBay seller sites, but they are far from ubiquitous—even on eBay.

Swan sees Skype, which generated revenues of $50 million in the most recent quarter, as "in the early stages of something big." So do many analysts. Caris & Co.'s Boyd particularly sees promise for the product with classified advertising. "Local online advertising is still early days," he says, adding that it could one day be a huge market for eBay.

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