Ebay Changes: Short-Term Pain = Long-Term Gain

Summary: Q4 okay, 2008 revenue outlook weak. We suspect latter due to company's uncertainty about impact of listing fee change and recession. Regardless of 2008, the changes are smart.

eBay appears to be addressing three of its four major problems:

• A change at the top: Meg Whitman is handing reins to John Donahoe, who appears focused on the right issues
• Reducing seller fees to combat competition.
• Improving the search and buying experience.

The final remaining step in reinvigorating the company is to sell Skype, which is not a core asset and is just a distraction.

The reduction in listing fees could have a negative impact on both revenue and the user experience in the short-term, as the site becomes flooded with listings. But sellers have been screaming bloody murder about eBay's high listing fees, which place the risk of listing items squarely on the shoulders of the sellers, so the change is smart. Assuming the transition is handled well, short-term pain should become long-term gain.

Q4:

Q4 exceeded Street estimates, but the core business decelerated.

• $2.18bn in revenues vs. $2.14 consensus.
  
• $0.45 EPS vs $0.41 consensus.
  

Core marketplace revenue decelerated to 18% from 23% in Q3. Paypal revenue growth was steady at 35% year over year, Skype decelerated to 76%. Pro forma operating margin increased more than a point, to 34.6%.

Outlook

2008 revenue growth outlook was a pathetic 11%-14%, vs. the 27% in Q3. Again, we suspect the company is hedging impact of fee change, recession, etc. Even if growth actually comes in this low, however, the changes should boost eBay's franchise value over the long-term.

Interview with New CEO, John Donahoe
Interview with John Donahoe

More on Fee Change:
Potential eBay Fee Change Has Experts Worried
Fixing eBay: Our Four-Step Plan

Seller Anger:
eBay Users Vent Rage to New York Times

Overall Strategy:
eBay's Real Problem: A World of "Auctions" and "Stores"

Change Needed at Top:
eBay: Time For CEO Meg Whitman to Go?