Majestic Research

Investor's Business Daily

Auction Leader eBay Lowers Its Outlook In 'Challenging' Time

By Doug Tsuruoka
Published: October 15, 2008

EBay late Wednesday reported third-quarter profit far above analyst views, but its fourth-quarter outlook lagged far below views, and the online auction king’s stock continued to plummet.

San Jose, Calif.-based eBay posted per-share profit of 46 cents, excluding items such as stock-based compensation, for the quarter, up 12% from a year ago and 5 cents over the consensus estimate of analysts polled by Thomson Reuters. Sales rose 12% to $2.12 billion, just short of analyst views but in line with a lowered outlook eBay released last week.

But the company says it expects per-share profit minus items this quarter of 39 cents to 41 cents, where analysts were expecting 47 cents. And it sees revenue of $2.02 billion to $2.17 billion, where analysts had expected $2.44 billion.

“We delivered strong results in what is a very challenging external environment, an environment we expect to continue in the fourth quarter and beyond,” eBay Chief Executive John Donahoe said in a conference call with analysts.

EBay shares were down about 6% after hours, after issuing its report. In regular trading, the stock fell 13.6% to a six-year closing low of 15.33. The stock has fallen more than 50% since April.

The biggest sign of trouble was in eBay’s core auction business. Gross merchandise volume, the value of all goods and services sold on eBay, fell 1% to $14.3 billion in the quarter ended Sept. 30 vs. the year-earlier quarter. It had surged 14% to $14.4 billion in the 2007 third quarter. Revenue for its core marketplaces unit rose just 4%, to $1.38 billion.

Other eBay units did better. Its PayPal online payments unit saw sales surge 27% to $597 million. Its Skype Internet telephony unit saw sales jump 46% to $143 million, and it added 32 million new users.

Wednesday’s report followed an announcement by eBay on Oct. 6 that it’s slashing 1,600 jobs, or 10% of its work force, in a pre-emptive strike against the effects of the growing economic slowdown.

Majestic Research analyst John Aiken says the downward pressure on eBay’s revenue is a sign of trouble, generally, for all e-commerce companies. He says the crisis in the financial and credit markets is causing consumers to spend less.

“The back half of the third quarter and part of the month of September (were) really negative for Internet companies—and eBay was the disproportionate negative in that group,” Aiken said.

Tracker Nielsen Online says Web traffic to eBay fell 3% in the third quarter vs. a year earlier, to a three-month average monthly audience of 65 million, from 66.9 million a year ago.

Citigroup analyst Mark Mahaney says eBay seems to be suffering the effects of recent market turmoil and its impact on consumers.

“We believe market-share losses and possibly poor execution around the mid-September fee/format changes” hurt eBay, he wrote in a note to investors this week.

He was referring to changes in eBay’s rules and fee structure in August that aimed at making the Web site more attractive. But they frustrated some online users. The changes included making electronic payments the basis of all eBay transactions.

Noting eBay’s Oct. 6 disclosure that revenue would come in at the low end of its guidance range, Mahaney wrote: “This is the first time in at least five years that eBay has not exceeded the midpoint of its revenue guidance range.”

Standard & Poor’s equity analyst Scott Kessler says a stronger dollar also hurt eBay in the quarter by shaving the value of its foreign sales. He says eBay’s overseas performance is also getting bruised by the impact of the financial crisis in Europe and other foreign markets.