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What is John Donahoe’s Gameplan with eBay?

Posted on Thursday, Jan 24th 2008

The big news this week is eBay’s CEO change. Meg Whitman retires, John Donahoe will be taking her place. There is wide-spread skepticism about John Donahoe’s choice as the successor to Meg Whitman. We just completed a comprehensive analysis of eBay’s business and a comparative analysis of eBay vs. Amazon.

After yesterday’s closing bell, eBay came out with a stronger than expected Q4 results. During the quarter total revenues stood at $2.18 billion, up 27% Y-O-Y and 15% sequentially driven by strong holiday sales and robust performance at PayPal, Skype and StubHub. Operating income in Q4 was $755 million, a growth of 31% Y-O-Y. PayPal, however, will need to watch Google CheckOut and BillMeLater, which Amazon has endorsed. Skype should be divested.

Adjusted Net Profit was $611 million in Q4 and EPS was $0.45 an increase of 45% Y-O-Y. Operating margin increased to 34.6% in Q4, from 33.4% in 4Q06. The Company ended the year with over $5 billion in cash. It generated $665 million in free cash flow.

Overall, my assessment is that eBay should reduce its dependency on Google for customer acquisition. It should also acquire some product search engines that offer good user experiences, along with customer acquisition. It has enough cash to build up an arsenal of product search engines that gives it more control over the entry point to the web.

More than 65% of the Company’s revenue comes from the marketplaces segment, where revenue growth slowed to 21.3% Y-O-Y and ended at $1.5 billion in Q4. The site attracted around 80 million visitors during the holiday season and registered over $16.2 billion of GMV a Y-O-Y increase of 12.3%. Shopping.com, classifieds and advertising grew 26%, 182% and 104% Y-O-Y during the quarter signaling successful diversification in the Company’s marketplaces business segment.

Outlook is soft. The core auctions business continues to slow. Amazon is luring power-sellers away. Rajiv Dutta, the head of this division, will need to figure out why, and how to stop the exodus.

54% of the Company’s marketplace revenues came from outside the US driven by a robust growth in International listings. Global Active users for marketplaces grew 2% Y-O-Y to 83.2 million. Total listings was up 4% Y-O-Y at 637 million. International listings was up 5% Y-O-Y.

PayPal’s revenues grew 35% Y-O-Y to $563 million in Q4. PayPal has a 8% marketshare in global online transactions. Active registered accounts at PayPal increased 16% Y-O-Y to 57.3 million. PayPal reached a global penetration rate of 54% on eBay. The Company is leveraging technology to minimize transaction losses. Net TPV (Transaction Payment Volume) grew 66% at merchant services. Net number of payments were up 22% Y-O-Y to 203.9 million. Transaction revenue rate was almost flat at 3.84% and transaction loss rate improved significantly to 0.27% from 0.43% a year ago.

Revenues at communications segment (Skype) grew 76% Y-O-Y to $115 million driven by the launch of Skype phone. Skype had a total of 276 million users, a growth of 61% Y-O-Y. Skype to Skype minutes grew 26% to 11.9 billion minutes. Total SkypeOut minutes were 1.6 billion in 4Q a growth of 10%.

For the full year revenues at eBay rose 29% to $7.67 billion and non-GAAP net income was $2.11 billion or $1.53 per diluted share. It generated over $2.18 billion in free cash flow in 2007.

The Company has guided for revenues of $2.0 – $2.05 billion in 1Q08 and $8.5 – $8.75 billion in 2008, which were below the street’s expectation and the stock was down over 8% in after hours trading. Non-GAAP EPS is forecasted to be $1.63 – $1.67. Operating margin is expected to be 32%.

The stock is currently trading at $27.13 with a market cap of $36.75 billion and 52 week range of $26.02 – $40.73. I’m afraid I cannot recommend that you buy this stock, especially not until I hear some concrete thoughts from Donahoe on how he plans to address eBay’s rather hairy issues.

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So any speculation behind the headline? What do you think Donahoe’s Gameplan with eBay is? And who are the people and why are they skeptical about Donahoe’s appointment?

Graham Warburton Thursday, January 24, 2008 at 1:12 PM PT

I don’t know Donahoe’s gameplan, so it would be unfair for me to comment. People who are skeptical worry about his inability to turn around eBay’s core auctions business, which continues to slow down.

My observation is that Donahoe is not an Internet visionary of the caliber that I would have liked to see at the helm of eBay, but I am open to be surprised. Take the example of Mark Hurd. Who would have known that Hurd would do such a splendid job at HP?

Sramana Mitra Friday, January 25, 2008 at 12:36 PM PT