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Jul 23, 2009
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Glimmer of hope in EBay marketplace sends shares up

Jul 23, 2009

SAN FRANCISCO (Reuters) - EBay Inc posted better-than-expected quarterly results after managing to slow a persistent deterioration in its main Web auctions and retail business, propelling its shares nearly 5 percent higher.

Photo: REUTERS/Robert Galbraith

But executives and analysts warned that consumer spending remained weak with unemployment rising and credit still tight, likely dampening revenue growth in coming quarters.

Chief Executive John Donahoe said the company was aggressively trying to turn itself around, after the company gave a third-quarter profit forecast on Wednesday 22 July in line with analysts' estimates.

In the second quarter, gross merchandise volume, or the total value of goods sold, excluding vehicle sales, fell 10 percent, sharply less than the 16 percent decline in the first quarter and a better showing than investors had foreseen.

"The buy side was gearing up for news they'd stabilized and this is probably confirming that," said RBC Capital Markets analyst Stephen Ju. "That's an incremental, directional improvement people have been looking for."

Cost controls and a partial month's contribution from Gmarket, the South Korean online retailer that eBay recently bought, also helped, Ju said.

Sluggish growth in recent years at eBay's marketplaces division -- which began with online auctions but now encompasses classifieds, fixed price sales and shopping sites -- has kept eBay shares under pressure.

The once fast-growing company that pioneered Web auctions is also fending off competition from rivals like Amazon, which said on Thursday 23 July it was acquiring online shoe seller Zappos.com for about $928 million.

Now eBay is relying on PayPal, its booming online payments unit that accounts for nearly a third of total sales, as a future growth driver.


Donahoe said the gross merchandise volume figures -- a data point keenly watched by Wall Street analysts -- improved for the first time in seven quarters, as more items moved. While sales in auctions fell, they rose in fixed sales by 19 percent.

"Our core marketplaces business is stabilizing with the economy as we execute against our turnaround priorities," he told analysts on a conference call.

Donahoe also pointed to growing market share for PayPal, which is adding new merchants, and the on-track integration of BillMeLater, the payments company acquired last year.

Still, he cautioned that it was too soon to declare victory and the planned three-year turnaround of marketplaces would be a "process of steady, consistent progress."

Pacific Crest analyst Steve Weinstein did not see a quick return to true growth.

"You can say they're not in this steep nosedive anymore but it doesn't look to me like they've really addressed the issues to get growth," Weinstein said. "When I look at the quarter, they beat a little bit, but if I back out Gmarket and the favorable switch in currency -- not really."

EBay also includes Internet telephone company Skype, which it is trying to spin off.

Second-quarter net profit was $327.3 million or 25 cents per share, versus $460 million or 35 cents a share a year ago.

Excluding one-time items, eBay earned 37 cents per share, a penny above the 36 cents per share expected, on average, by analysts, according to Reuters Estimates.

Revenue fell 4 percent to $2.1 billion, above the $1.99 billion, or 9 percent drop, expected by Wall Street. The company's marketplaces division saw a 14 percent drop in revenue while sales in fast-growing PayPal rose 11 percent.

In the marketplaces division, the revenue drop slowed from the prior quarter. The effects of currency exchange rates had a negative effect since more than half that revenue comes from outside the United States.

Operating margins slid to 19.6 percent in the quarter from 24.8 percent a year earlier, the company said, because of the effect of the stronger U.S. dollar against foreign currencies.

EBay said it expected third-quarter adjusted earnings per share in a range of 34 to 36 cents per share, compared with the 35 cents per share expected by Wall Street.

Also on Wednesday 22 July, eBay provided more details on its previously announced employee stock option exchange program. In an email to employees, Donahoe said workers with stock options "significantly" underwater would be able to exchange them for restricted stock units between August 10 and September 11.

Shares in eBay rose 4.8 percent to $20.39 after closing on the Nasdaq at $19.45.

(Reporting by Alexandria Sage; Additional reporting by Alexei Oreskovic; Editing by Edwin Chan, Gary Hill)

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