eBay zeroes in on PayPal in much-needed overhaul

SAN JOSE, California Wed Mar 11, 2009 8:44pm EDT

Brian Winer of Los Angeles uses an eBay kiosk to check on an item he has for sale during the Consumer Electronics Show in Las Vegas, Nevada January 6, 2006. REUTERS/Steve Marcus

Brian Winer of Los Angeles uses an eBay kiosk to check on an item he has for sale during the Consumer Electronics Show in Las Vegas, Nevada January 6, 2006.

Credit: Reuters/Steve Marcus

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SAN JOSE, California (Reuters) - EBay Inc, fending off worries that its best days are over, hopes to transform itself by galvanizing growth at its PayPal payments system and jump-starting its lagging core business, top executives said on Wednesday.

Best known as the Internet's premier auction site, eBay expects its burgeoning PayPal division to spearhead growth in global revenues to $10-12 billion and underpin sedate -- but steady -- single-percentage annual earnings growth by 2011.

To get there, Chief Executive John Donahoe vowed to pursue "ruthless" change in its marketplaces business that began with auctions but now encompasses fixed-price sales and even classified ads.

Donahoe told Reuters in an interview that eBay had befuddled Wall Street in recent years by forging a three-pronged business -- eBay, PayPal and Web-based telephone company Skype -- with less emphasis on its once-preeminent auctions.

"EBay was the big leader out of the gates, but we're going through a change," Donahoe said. "Every leader in every business has to go through periods of change."

But skeptical analysts said eBay signaled few dramatic shifts on Wednesday at its core marketplaces unit beyond ongoing efforts to capture more sellers and buyers and regain the market share relinquished to rivals, especially online retailer Amazon.com.

The San Jose-based online giant, which did not provide a full-year outlook in January [ID:nLM73754], said adjusted earnings per share would grow in the mid-single digits on a percentage basis from 2009 to 2011. [ID:nWNAB3042]

EBay can also save $2 billion over 3 years by trimming processing costs, enhancing online customer support to avoid resource-wasting processes, and more targeted marketing, Chief Financial Officer Bob Swan said.

Within two years, marketplaces should see $5 billion to $7 billion in revenue, eBay said, spurred by search, catalog and platform improvements. That compares with 2008's $5.6 billion.

Still, Collins Stewart analyst Sandeep Aggarwal said Wall Street wanted "more tangible evidence of sustained recovery."

"There is nothing new they gave us to make us feel more positive," Aggarwal said.

THE TIMES, THEY ARE A-CHANGING

Ebay executives were rather more sanguine.

"The eBay you knew is not the eBay we are, or the eBay we will become," Donahoe told analysts, opening the presentation.

EBay pushed its fast-growing PayPal unit into the spotlight, saying it expects that business to double by 2011.

PayPal President Scott Thompson unveiled a deal with Research in Motion for PayPal to be the exclusive payments system for a growing family of applications on the popular Blackberry Smartphone.

And eBay will open its PayPal platform to developers, allowing them to craft applications in the hope that they will expand its adoption around the world.

"Its potential is enormous," Donahoe told Reuters. "It's not just a stepsister ..., it's a second core."

Globally, total payment volume is expected to reach $100 billion to $120 billion by 2011, Thompson said. PayPal now commands a 79 percent market share in North America, but just 41 percent internationally, the company said.

While PayPal margins will likely decline through 2010 due to the integration of online payments unit Bill Me Later, they will exceed 18 percent to 20 percent long-term, Thompson said.

"We believe it will be bigger than marketplaces because its target audience is all of e-commerce," Donahoe said.

Donahoe also appeared to leave the door open on speculation that fast-growing Skype would be spun off, saying he would make the right decisions to "maximize Skype's potential and value."

On Nasdaq, eBay closed up 4.77 percent at $11.63, while Amazon.com rallied 4.31 percent to $68.54.

The analyst presentation saw eBay executives trying to convince skeptical Wall Street analysts that it remains a vibrant, albeit changing, e-commerce player.

Analysts say eBay -- first known as the online marketplace for collectibles from Barbie dolls to quilts -- needs to boost its performance in the deepening recession, as well as fend off a resilient Amazon, which has stolen its market share.

Donahoe -- noting that eBay was no retailer -- warned that growth at marketplaces would slow in 2009, keep pace with the e-commerce market in 2010, then grow faster in 2011.

EBay executives admitted past mistakes but Donahoe pledged to fix the struggling unit.

"We were too slow in our approach to change. We were letting everyone into the marketplace, regardless of the experience they gave to buyers, " Marketplaces chief Lorrie Norrington said. "We have to do more and we have to do it faster.

EBay's shares have lost two-thirds of their value since a year ago. They now trade at about seven times estimated 2009 earnings, at a deep discount to Amazon's 42 times.

"The question is: will those changes make the experience competitive with other online retailers like Amazon or Zappos who aren't standing still. That's hard to say," Pacific Crest analyst Steve Weinstein said.

(Editing by Edwin Chan, Andre Grenon, Leslie Gevirtz, Richard Chang)

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