eBay warning: A cloudy Christmas weather forecast

By Angela Gunn, BetaNews

October 15, 2008, 8:40 PM

The company made money during the third quarter, but eBay officials warned during its quarterly earnings call on Wednesday that the outlook for the holiday season is fairly grim.

The company's making money, though, particularly in the PayPal unit, which reported 27 percent growth and $597 million in revenue. During the quarter, according to CEO John Donahoe, Paypal's volume exceeded eBay's volume. That's the first time that's happened; PayPal is now doing more non-eBay transactions than eBay transactions.

Donahoe estimated global market penetration at around 60% and says they can do better, and expects that the coming integration of the recently purchased Bill Me Later service will strengthen the service's financial hand.

Sometimes it's hard to remember that Skype, the popular communications service, is an eBay property, and that appears to be the way the company likes it.

"The more we let Skype stand alone," said Donahoe, "the more it delivers results," pointing to its 51% user growth. He dodged pointed questions about possible spinoffs, saying the service "is not a distraction." Elsewhere in the company, "adjacency" services such as ticket reseller StubHub and the classified and ad partnerships programs brought home the bacon, reporting double and even triple-digit gains.

View the full EBAY chart at Wikinvest

And as for the auction service itself...well, it's not good when that portion of an earnings call is prefaced with the term "last but not least," followed quickly by phrases such as "not what we would have liked" and "we haven't kept up."

Continued work on search improvements and the never-ending eBay saga of The Sellers, The Carrot, and The Stick kept things lively in the auctions realm, with marketplace listings up 26% year-over-year since various system changes have taken effect. Many of those changes were designed to improve the buying experience, and Donahoe reported that the highest-rated sellers were seeing better results while lower-rated "subpar sellers" saw fewer -- a trend he attributed to buyer choice rather than crackdowns from the top. (The often-irascible seller community might disagree; Donahue and his fellow execs have ben magnets for criticism from that quarter since he took the job back in April.)

Marketplace revenues are up 4% this quarter, but the service's gross merchandise volume (GMV) fell one percent -- the first decline in that measure in eBay's history. The firm has already announced layoffs affecting about 10 percent of its employees.

The auction-division trend charts -- it wouldn't be an earning report without charts -- looked for the most part like a collection of ski trails, and not all bunny slopes either. A reworked approach to fees has increased the number of new listings but a combination of poor deal-searching tech and the economic climate left both the number of items sold and prices for those items depressed.

The tough economy and relatively stronger dollar leave eBay's leadership as perplexed as anyone about what's ahead.

"I wish there was clarity in my crystal ball as to what'll transpire during the holiday season, but there's not," said Donahoe, noting that the company's guidance of 25 to 27 cents/share profit was a remarkably wide range for the firm. The company also predicted $2.02 to $2.17 billion in revenue, below previous analyst estimates of $2.43 billion.

EBay opened at $17.01 on Wednesday and skittered down along with the rest of the market, closing at $15.33 and grazing in after-hours trading even below its 52-week low of $15.00.