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Summary:

Like Yahoo (YHOO) yesterday, eBay’s (EBAY) stock is up following its third-quarter earnings report, rising some 3 percent. But while eBay is making progress at getting its business growing again, there are still a couple of issues to consider, namely falling operating margins and the nagging […]

Like Yahoo (YHOO) yesterday, eBay’s (EBAY) stock is up following its third-quarter earnings report, rising some 3 percent. But while eBay is making progress at getting its business growing again, there are still a couple of issues to consider, namely falling operating margins and the nagging question of what to do with Skype.


eBay’s revenue grew a healthy 30 percent in the quarter, down just slightly from the 31 percent growth rate in the third quarter of 2006. The organic growth rate tells an even more impressive story. Organic revenue grew 23 percent in the latest three-month period, up from the 20 percent rise a year ago. In other words, eBay is making more from its core business without having to import revenue growth through acquisitions.

So far, so good. But it’s a little troubling to see the operating margin fall to 31.4 percent, its smallest margin in several quarters. Last quarter, non-GAAP operating margin was 32.4 percent and a year ago, it was 32.1 percent. In short, revenue is growing, but the cost of running eBay has been growing faster.

eBay CFO Bob Swan said in an interview that the third quarter seasonally delivers lower margins, as relatively slower revenue is coupled with higher spending ahead of the holiday season. He pointed out that eBay’s fourth-quarter guidance implies a recovery in operating margins, which could leave the company close to the 33 percent margin it has said it expects
for the full-year 2007 period.

Revenue rose 26 percent in eBay’s marketplace business, flat with last quarter, while PayPal revenue increased 35 percent, above the 34 percent growth last quarter. Skype was a little less impressive. Revenue did rise to $96 million from $90 million, but that growth feels a little slow for a business that was hoped to be lucratively disruptive, and it’s still only 5 percent of eBay’s total revenue.

But eBay has vowed to put the overvalued price it paid for Skype behind it, and some of the metrics included show why. Although 246 million users are signed up for Skype, the number of Skype-to-Skype minutes has fallen 8 percent year-over-year, to 6.1 billion.

And while Skype Out minutes (which bring in revenue) are up 25 percent year-over-year, to 1.4 billion minutes, they are still less than a quarter of the free Skype-to-Skype calls. Skype is doing OK, but it’s not the growth driver and synergistically magical force eBay had hoped for.

Skype’s book value was $2 billion after the revaluation, or six times the trailing 12 month revenue. The value that the market is according eBay’s stock – its $55 billion market cap – is 7 and a half times its recent revenue. Put another way, Skype may be 5% of eBay’s revenue, but it’s value is equal to 3.6% of eBay’s market value. Either way, Skype seems valued at a slight discount to the rest of eBay.

Meg Whitman got a little confessional on the conference call about Skype, saying that the criteria for the $1.4 million earnout promised to Skype’s founders — including revenue growth and gross margin — siphoned money away from things like customer support and user interface that could have “delighted the user.”

“We over-monitized Skype a little bit and we dropped a bit too much of the profitability to the bottom line,” Whitman said. “The team wasn’t focused on how we could move excess profitability to drive user engagement.”

Now eBay wants to make the Skype experience more delightful, which would translate into less profits, or maybe a loss, at Skype in the near term. Skype has been profitable for three straight quarters — eBay didn’t say how profitable it was this last quarter — but it may have to break that streak if it means finally turning Skype into a service with broad mainstream appeal.

  1. eBay’s acquisition of Skype was ingenious. In ten years traditional cell phone networks will be obsolete. WiMax will blanket the nation with high-speed wireless internet and you will have a WiMax phone attached to your hip. In fact your home telephone will also be wireless ip – and Skype to Skype calls are free. Which service will you use for your internet calling? The biggest and the best . . .

    http://www.InternetTvTalk.com

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  2. Maybe, but a lot of competitors can pop up over the course of ten years.

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  3. Why don’t they make a Skype phone? That would be cool. I want free cell phone service…

    Team up with Motorola, use wimax…

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  4. Check out the 3 Skype Phone — it’s not out yet, but it’s coming soon in UK. Hope to see something like it here in the U.S.! Probably wishful thinking given mobile carrier stronghold.

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  5. [...] seeing some of that confusion at play in eBay’s stock following the release of its third-quarter results late Wednesday. The company posted a massive loss, but the stock rallied as much as 6 percent in [...]

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  6. @GeraldZ

    What!? Mobile to mobile calling is already free. Why do I need Skype? Is persuading all your friends to use Skype over this future WiMAX network any different than persuading all your friends to use the same mobile carrier today?

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  7. Wimax rocks and can substitute not only mobile phone networks, but also wifi.

    You get a cheap flatrate contract that you can use on all your devices. No SIM card necessary and no overpriced 2 years contract. Wouldn’t you love to have the iPhone without the expensive contract from AT&T, but with great bandwith that equals wifi and is everywhere to be had? The Xohm network offers a DSL like experience yet in all Chicago and the surrounding suburbs, even in driving trains and cars with a seamless handover between cells. Motorola say they built it up in just 2 weeks.

    I just wrote a longer article about this topic, but only in German. So I recommend what Vinay from India just wrote in his blog:

    Thursday, October 18, 2007
    Why WIMAX will succeed?
    http://voipguides.blogspot.com/2007/10/why-wimax-will-succeed.html

    At the Mobile Broadband Forum Europe in Berlin a Nortel spokesman said to me: “The coolest device would be an iPod Touch with Wimax”. And Motorola told me that they have such devices already in their laboratories. So great things are to come, maybe already in this year’s HOliday season.

    That’s much better than “persuading all your friends to use the same mobile carrier”, as Jesse Kopelman recommends.

    Many people cross fingers that the International Telecommunications Union (ITU) takes the right decision in favour of mobile Wimax when they now decide about the further 3G development. Especially Koreans would be happy, since they already got their proprietary “Wibro” standardized as “mobile Wimax” (802.16e). Now they hope that ITU standardizes it also as IMT-2000, which is the regulation for mobile cellphone broadband.

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  8. It just has happened:

    WiMax has been approved as an official International Telecommunication Union (ITU) mobile wireless standard, according to an email posted on the Institute of Electrical and Electronics Engineers Inc. (IEEE) 802.16e Working Group reflector last night.

    News that WiMax is now officially a member of the IMT-2000 family of 3G standards should make it easier for operators to deploy networks in markets where spectrum is allocated specifically to IMT technologies.

    Congratulations!

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  9. the problem with skype and most other voip is that it is being sold as a value product and not for functionality. Why are the skype to skype minutes dropping. Regular phone calls are getting cheaper and so there is less reason to use any alternative to dialing an old fashion phone. Cell phone beat everything on the convience factor. Call costs on regular phone networks will come down further untill we soon pay a small monthly fee for unlited calls to anyplace. At that point most skype(and other voip) users will find little reason continue with the complication of an aditional phone(or soft client) with aditional phone number, etc.

    I am not saying that voip has no future. It does as a premium priced way of add features to telephony or for some type of direct communications toggled from a website(jaxtr,Tringme,etc.). Basic simple voice calls (the vast majority of what skype is used for) will return to the major carriers as their prices drop close to zero.

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  10. [...] speed ontogeny has fresh upraised whatever concerns most its forthcoming and the toll Ebay paying for the VOIP provider. Ebay drawing haw exhibit that [...]

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