Troy Wolverton

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eBay's Profit and Revenue Soar

Troy Wolverton

eBay on Thursday reported surging fourth-quarter profits and sales.

The online auction company posted net income of $87 million, or 28 cents per diluted share, on $413.9 million in revenue. That's up from the $25.9 million, or 9 cents a share, eBay earned last year on $219.4 million in revenue.

Excluding items, the company earned $87.6 million, or 28 cents a share, on a pro forma basis. Wall Street analysts surveyed by Thomson Financial/First Call expected the company to earn 24 cents per share on $386.6 million in revenue in the quarter.

The company's performance in the quarter well exceeded its guidance and most expectations, noted Safa Rashtchy of U.S. Bancorp Piper Jaffray.

"Either they were extremely conservative or they really had a breakout quarter," Rashtchy said. "Everything worked well together as a reverse of Murphy's law." U.S. Bancorp Piper Jaffray does not have any investment banking business with eBay.

eBay results were assisted by a strong contribution from its recently acquired PayPal business. For the quarter, PayPal posted revenue of $74.7 million, up 87% from the year-ago quarter.

Total accounts at PayPal jumped 82% in the quarter compared with the year-ago period to 23.3 million and the total number of payments grew by 76% to 39.2 million. Meanwhile, the total transaction volume at the online payments company increased 77% compared with the year-ago period to $2.1 billion.

But PayPal was not the only standout portion of eBay's business. eBay's international operations -- the company operates sites in the United Kingdom, Germany, France, among other countries -- also performed well.

Revenue from eBay's international auction sites, excluding online payments, came in at $109.1 million, up from $40.1 million in the year-ago period. International sales, including online payments, now comprise 30% of eBay's revenue, up from 18% in the year-ago quarter.

Although its growth was slower than the other two segments, eBay's U.S. auction business also did well. Revenue at the U.S. business, excluding online payments, came in at $225.1 million, up 30% from the $173.6 million the segment reported in the year ago period. Fueling that was a surge in transaction revenue, which rose 58% from $134 million in the fourth quarter of 2001 to $211.4 million in the just completed quarter. eBay charges customers to list items on its sites and takes a commission on items that are actually sold through it.

The increase in transaction revenue helped to make up for a steep decline in advertising sales and offline revenues. Advertising revenue fell 74% in the quarter to $7.1 million from $27.4 million in the fourth quarter of 2001.

eBay officials gave no details about the decline in advertising revenue and a company representative did not return calls seeking comment. But analysts speculated that they decline had a lot to do with problems at AOL(AOL), which sells advertising for eBay.

The company also seems to be focusing more on its core auctions and transactions business than on advertising, said Jeff Fieler, who covers the company for Bear Stearns.

"I'm kind of getting the sense that eBay is giving up on their advertising side," Fieler said. In some ways, since they stopped focusing on advert, they've done a better job with their transactions business. One day, they may come back to it."

Bear Stearns does not have any investment banking business with eBay.

Meanwhile, offline revenues fell from $7.8 million in the year-ago period to $1 million in the fourth quarter, a decline of 87%. Over the last year, the company has sold off its two primary offline divisions: the Butterfields auction house and Kruse Automotive, a classic car auction company.

In a conference call with investors and analysts, eBay Chief Executive Officer Meg Whitman attributed the company's overall success in the fourth quarter in part to a coordinated merchandising and marketing campaign.

One part of the company's strategy involved the toy sector, where the company met with toy retailers and manufacturers before the holiday season to come up with a list of what would be the top 20 toys during the season, Whitman said. The strategy helped to boost listings and sales on the site, she said.

Meanwhile, eBay rolled out its first television advertising campaign in the quarter, which sought to portray the company as a mainstream place to shop during the holidays. The campaign helped drive new users to the site and encourage old users to return, Whitman said.

The television advertising cost the company about $14 million, said Rajiv Dutta, the company's chief financial officer. But because of the success of the marketing campaign, the company plans to continue television advertising throughout 2003, Whitman said.

"We are re-evaluating our marketing plan. We will do more TV than we previously anticipated," she said.

Despite the increase in advertising spending, eBay upped its guidance for 2003. The company now expects its 2003 earnings to reach as high as $1.12 per share, on up to $1.9 billion in revenue. Previously, the company has said it expected 2003 earnings to come in between $1.02 to $1.05 per share on revenue between $1.77 billion to $1.83 billion.

eBay has previously projected that it will post $3 billion in revenue on around $30 billion in gross merchandise sales through its site by 2005.

eBay shares closed down $2.25, or 3%, to $71.25 in regular trading on the Nasdaq national market on Thursday. In after-hours trading on the Island ECN, company shares hit $71.47, up 1%.