eBay Fails to Impress

Updated from 4:32 p.m.

eBay ( EBAY) posted a solid third quarter and named a trusted lieutenant to oversee its big Internet phone acquisition. But investors sold the stock late Wednesday as the company failed to deliver a big boost to guidance.

The world's largest Web auction site posted a 40% profit gain and a 37% rise in sales for its quarter ended Sept. 30. The numbers matched the Wall Street analyst consensus estimates.

San Jose, Calif.-based eBay also named its longtime finance chief, Rajiv Dutta, president of its recently acquired Skype unit and offered fourth-quarter and 2006 guidance that was mostly in line with expectations. But Wall Street roared its disapproval, sending eBay down 7% late Wednesday.

"For some reason, people had their hopes much higher than this, especially for the guidance," said Safa Rashtchy, an analyst with Pipper Jaffray who rates eBay shares as market perform and doesn't own them. "Everything seems to be in line."

For the third quarter, net income rose to $255 million, or 18 cents a share, from the year-ago $182 million, or 13 cents a share. On a pro forma basis, excluding certain costs, earnings were 20 cents a share, a penny ahead of eBay's target and in line with the Thomson First Call estimate. Sales hit $1.1 billion, beating the $1.08 billion target.

"We saw very strong growth across every part of our business," said CEO Meg Whitman in a press release. "It's wonderful to see such strength in our two largest marketplaces, the U.S. and Germany."

"Overall, revenue, profit and cash exceeded our expectations quite strongly," Dutta said in an interview. "It was really driven by the acceleration in the U.S. business and the German business. PayPal overall had an extraordinary quarter."

eBay said gross merchandise volume, representing the value of all successfully closed items on eBay's trading platforms, rose 30% from a year ago to $10.8 billion. Total payments accounts at PayPal rose 53% to 86.6 million, and total payment volume, reflecting the dollar volume of payments initiated through the PayPal system, jumped 44% to a record $6.7 billion.

The company also updated its fourth-quarter guidance. The company said it expects to earn 21 cents a share on a pro forma basis for the fourth quarter, a penny shy of the Thomson estimate and reflecting a penny's dilution from the Skype deal. eBay expects fourth-quarter revenue of around $1.27 billion, including $35 million from Shopping.com and $20 million from Skype. Excluding Shopping.com and Skype, the guidance represents a $10 million increase from previous estimates, "reflecting strong business momentum," eBay said.

For 2006, eBay expects to make about 98 cents a share, including 4 cents' worth of Skype dilution, which leaves it short of the $1.03-a-share Wall Street target. The company said revenue should be $5.8 billion or so, including $200 million from Skype. Analysts were looking for $5.76 billion.

eBay also said Dutta will work with Skype CEO Niklas Zennstrom, and Whitman on Skype's growth, along with integration across eBay and PayPal. Dutta will remain a member of eBay's executive management team.

"Rajiv's contributions to eBay's success during the past seven years have been enormous," said Whitman. "He'll play an even bigger role in eBay's future by helping Niklas and his team achieve Skype's full potential."

Dutta's appointment to Skype will be viewed positively because he is well-liked by investors, Rashtchy said.

Shares of eBay rose $1.59 during regular action Wednesday to $42.01 before reversing course after hours and dropping $2.81 to $39.20.

The news comes at the end of an eventful period for eBay, which in addition to buying Skype set plans to pay $370 million to buy VeriSign's ( VRSN) payment gateway business in a bid to bolster Paypal.

eBay said on the call it is starting a new advertising campaign for the holiday campaigns in several major markets including the U.S.

"We want people to check eBay first no matter what you are looking for," said Whitman. "It is a more inclusive message than last year."

Investors have been more sanguine about the prospects of eBay than rivals such as Yahoo! ( YHOO), which posted a better-than-expected profit gain earlier this week. eBay and other Internet commerce companies such as Amazon ( AMZN) are facing heightened competition from online rivals and traditional retailers, as the number of new households entering cyberspace continues to shrink.

But skeptics of eBay have only been emboldened since the company agreed to pay more than $2.6 billion for Internet telephone service provider Skype, whose revenue was just $7 million last year and is targeted at some $60 million this year. Meanwhile, the impact of Gulf Coast hurricanes on energy prices and the broader economy remains a big question mark.

Even so, eBay's unique offerings have earned the company its fans.

"I think we are going to see weak consumer spending at least over the next year," said Manpreet Singh, an analyst with Profit Investment Management, which owns eBay shares among its $750 million under management, in an interview before earnings were released. "eBay will benefit from that because you can get the same quality of goods you would have from traditional retailers at a lower cost."

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