EBay Forecasts Miss Some Analysts’ Estimates as Marketing Costs Increase

By Danielle Kucera - Oct 20, 2011 7:11 AM GMT+0700

EBay Inc. (EBAY), the largest online marketplace, forecast fourth-quarter sales and profit that missed some analysts’ estimates as the company’s efforts to woo developers and strengthen payment services erode profitability.

Revenue will be $3.2 billion to $3.35 billion, EBay said today in a statement. Excluding some costs, profit will be 55 cents to 58 cents a share. Analysts on average had projected sales of $3.3 billion and profit of 58 cents, according to data compiled by Bloomberg. EBay shares dropped 4.2 percent.

Chief Executive Officer John Donahoe is leading a turnaround of the e-commerce company, whose stock had plummeted 83 percent in five years to a low of $10.27 in 2009. EBay is spending to roll out new platforms and products and integrating acquisitions made in the past year to increase the use of its services across the Web, moves that may weigh on earnings in coming quarters.

“Some of the acquisitions they made probably depressed margins a bit,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. “It’s a seasonally big holiday period, and given the macro backdrop, investors may have been expecting a little more upside in the quarter.”

EBay shares fell to $31.80 in extended trading after the report. The stock declined 2 percent to $33.18 at the close in New York. Shares of the San Jose, California-based company have climbed 19 percent this year.

Third-Quarter Earnings

Third-quarter net income was $490.5 million, or 37 cents a share, compared with $431.9 million, or 33 cents, a year earlier. Sales climbed 32 percent to $2.97 billion, while analysts predicted $2.91 billion. Before certain costs, profit was 48 cents, matching the average estimate.

The company’s PayPal online-payment unit led growth in the third quarter, with 103 million active registered accounts, a 14 percent increase from the previous year. PayPal revenue jumped 32 percent to $1.11 billion.

EBay’s operating margin, excluding some items, narrowed to 25.3 percent in the third quarter, compared with 28.7 percent in the same period last year.

Sales and marketing expenses rose 29 percent to $623.3 million, EBay said. Spending on marketing new products may also have weighed on the company’s forecast, an investment that should pay off later, Sebastian said.

“We’re seeing the TV ads fairly widespread in front of the holidays,” said Sebastian, who rates the stock “outperform.” “They’re probably taking a cautious approach. I think EBay’s progress continues. It’s not an overnight progression.”

‘Solid’ Holiday Season

EBay’s marketing campaign that began in September, which includes television advertisements, will last through the fourth quarter, Chief Financial Officer Bob Swan said on a conference call today. The company anticipates a “solid” holiday season, Donahoe said.

“In the last 18 months, our user experience got to a place where we’re proud of,” Donahoe said in an interview. “Our investors have asked, ‘When are you going to start marketing? You guys have improved this so much.’ The marketing campaign is more focused on introducing people to today’s EBay than it is about driving short-term revenue.”

Aiming to attract more retailers in a market dominated by Seattle-based Amazon.com Inc., Donahoe unveiled EBay’s new X.commerce system last week at the company’s Innovate developer conference in San Francisco.

The platform lets any developer create products and connect with retailers, without requiring them to use EBay. It incorporates technologies from the company’s purchases of Magento, an e-commerce platform; Milo, which keeps track of store inventory; and RedLaser, a company it bought in June 2010 that lets mobile users scan bar codes.

Mobile Payments

EBay also added to its stable of mobile-payment services with the $240 million purchase of Zong Inc. in August, as it seeks to help customers make purchases in stores over their mobile phones. In addition, the company is building relationships with big retailers through its June acquisition of GSI Commerce Inc.

EBay expanded its relationship with social network Facebook Inc. last week, saying developers for both the company’s GSI and Magento platforms will work on creating social commerce functions, such as clickable tabs for e-commerce that mirror Facebook’s “like” button.

The online retailer will have to show that this suite of new offerings and its acquisitions will work in harmony and compete with Amazon before investors will trust it can move beyond past mistakes, said Herman Leung, an analyst at Susquehanna International Group in San Francisco.

“For me, it’s sort of a show-me story,” he said in an interview. “These are all interesting concepts, but I would like to see results before being committed. These are new areas, offline payments -- there’s a lot of consumer education that’s involved.”

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net