Lights Out, eBay

Exit light. Enter night.

Rick Munarriz
Rick Munarriz
Jan 24, 2008 at 12:00AM

It was a "lights-out" quarter at eBay (Nasdaq: EBAY), and I mean that on a few different levels.

  • The online auctioneer had a lights-out fourth quarter, blowing past Wall Street's expectations.
  • Meg Whitman is turning off the light, stepping down as CEO at the end of the current quarter.
  • With guidance of single-digit percentage gains on the adjusted bottom line in 2008, growth investors may as well turn out the light.

The growth party is over. Cue up Metallica's "Enter Sandman" and find your octane elsewhere. Exit light. Enter night.

eBay's last quarter
The fourth quarter was a good one. Revenue climbed 27% to hit $2.2 billion. Earnings rose by 57%, to $0.39 a share. On an adjusted basis, profits soared 45% to $0.45 a share. On that basis, the company smoked analysts, who were projecting net income to clock in at $0.41 a share.

As usual, PayPal has been the real star at eBay. Revenue increased 35%, as the online financial payment service enabled the exchange of more than $14 billion in total payment volume. The PayPal platform now accounts for 8% of all money being spent in cyberspace.

The company's namesake marketplace was a mixed bag. Revenue climbed 21%, fueled by the nonorganic benefit of its StubHub acquisition and the rollout of Kijiji (eBay's attempt at playing Craigslist's game, with a free classifieds site attracting 3 million unique monthly visitors). A weak dollar also helped, given that 54% of eBay's transactions now take place outside the United States.

The volume of merchandise sold through eBay climbed just 12%. On the bright side, listings inched higher year over year, reversing the negative trend that had reared its ugly head in each of the two previous quarters. Active users may have grown by only 2% over the past year, but at least they're converting well.

This brings us to Skype. It's still a speedster, even after the earlier $900 million writedown. Skype revenues surged 76% to $115 million during the period. Unfortunately, that's just a thin 5% slice of eBay's revenue pie. The online chat service is rocking with 276 million registered users, but eBay still has to prove that it can effectively monetize the platform.

Whitman's last quarter
The rumor mills were right for a change. Whitman is leaving eBay. She will step down at the end of March, replaced at the helm by John Donahoe, president of eBay's marketplace division. Whitman isn't kicking completely free of the eBay habit; she will remain on the company's board of directors.

During last night's call, Whitman expressed the need for a fresh set of eyes to tackle the challenges -- and opportunities -- facing eBay. Why did eBay hire internally, then? Why is it promoting someone out of the company's most problematic subsidiary?

Related Articles

The questions may be the answers. Donahoe is still relatively new to eBay, and he has a radical plan to get eBay back on track. Believe it or not, after years of perpetual hikes, his first move as CEO will be to lower fees at eBay.

Growth's last quarter
The last time eBay used the term "rebalancing the marketplace," it increased prices on its eBay Stores product, sending many of its power sellers reeling. The company's new "rebalancing" will involve lower transaction fees. Insertion fees will remain intact. It's important for eBay to remain a platform where sellers price their wares reasonably. The insertion fee is a great sobriety test on that front.

The company has tested lower fees overseas. Since eBay has advertising relationships with both Google (Nasdaq: GOOG) and Yahoo! (Nasdaq: YHOO), it can help offset some of the lost fee revenue through interactive marketing. The strategy has worked in places like Korea, where eBay claims it's gaining market share on leader Gmarket (Nasdaq: GMKT). Is it tonic enough to make eBay grow again in popularity?

The biggest shortfall of lowering fees to try to win back sellers who have fled eBay over the years is that performance will take a hit this year. The company's revenue guidance of $8.5 billion to $8.75 billion in 2008 implies growth of just 11% to 14%. Wall Street was projecting a top-line showing of at least $9 billion. Things get uglier on the way to the bottom line. On an adjusted basis, earnings will grow just 7% to 9% higher, to between $1.63 a share and $1.67 a share.

Lower fees alone won't do the job. Sellers have had cheaper auctioning outlets like Amazon (Nasdaq: AMZN), Yahoo!, and (Nasdaq: OSTK) in the past. Many of those sites are either shuttered or collecting cobwebs.

Donahoe is certainly brave. He knows he's walking into a trap. Whitman gets to leave before the rest of the world realizes that eBay has transformed itself into a slow-growing blue chip. Only in Donahoe's tenure will the market start valuing eBay's shares accordingly. I guess that's another way of "rebalancing the marketplace," but I have clearer instructions: Will the last growth-stock investor to sell please turn out the light?