October 16, 2008, 12:00 AM

Merchandise sold on eBay falls 1%, the first decline in company history

EBay Inc. posted fiscal Q3 sales of $2.12 billion, up 12% from last year, and net income of $492 million, compared to a loss of $936 million a year earlier. But total sales fell for the first time, a sign of continued weakness in eBay`s auction unit.

Growth in eBay Inc.’s core auction business has been slowing for some time and with the economy weakening, the company reported its first-ever decline in the dollar value of sales on eBay in the fiscal third quarter ended Sept. 30.

Gross merchandise volume in the quarter totaled $14.28 billion, down 1% from $14.40 billion in the same quarter last year and 9% lower than $15.68 billion in sales in Q2 2008. Year-to-date gross merchandise volume on eBay was $46 billion compared to $43.31 billion in 2007.

“Clearly GMV in the third quarter was not what we would have liked but we remain confident in our overall direction and believe we are on the right path,” CEO John Donahoe said in a call with analysts, according to a transcript provided by SeekingAlpha. “EBay enjoys a global leadership position in e-commerce but buyer and seller expectations have been rising and we have not kept up. Thus we need to drive bold changes to continue our leadership position.”

EBay has been busy making changes to its auction business recently, trying to make the site more attractive for buyers and boost sales. It’s worked to weed out bad sellers, in part by rewarding top-rated merchants with discounts.

Colin Sebastian, an analyst who follows eBay for Lazard Capital Markets says he’s spoken with several merchants recently that have moved from eBay to Amazon and believes eBay is going through something of an identity crisis. “They are hearing loud and clear from their sellers that the platform is not as favorable as it once was for them,” Sebastian says. “EBay is making a lot of changes to its web site; it’s taking time for people to adjust.”

In September, eBay reduced fees for fixed-price items, seeking to beef up its non-auction sales and stave off competition from Amazon.com.

“Our fixed price fee changes will help improve selection and give buyers greater choice,” Donahoe told analysts. “Fixed price represented 46% of GMV in Q3 and grew 11% for the quarter, which we believe is roughly in line with e-commerce growth rates globally.”

However, Donahoe stressed that eBay is not getting out of the auction business. “I’m frequently asked if we are promoting fixed price at the expense of auctions and the answer is no,” he said. “What we are doing is building a marketplace that lets buyers and sellers choose the format they prefer.”

Overall, eBay reported Q3 revenue of $2.12 billion, up 12% from $1.9 billion for the same quarter last year, and net income of $492 million, compared to a loss of $936 million in the year-ago quarter. Last year’s loss largely stemmed from a $1.4 billion write-off related to its acquisition of Internet telephone company Skype.

Year-to-date, the company reported revenue of $6.5 billion compared to $5.5 billion in 2007. EBay`s year-to-date net income was $1.41 billion compared to a loss of $182 million last year.

PayPal, eBay’s online payment service, posted another strong quarter and for the first time generated more than half its revenue from purchases made on non-eBay retail sites. PayPal posted $597 million in net revenue, a 27% increase over $470 million in the same quarter last year. Net total payment volume for the quarter was $14.81 billion, an increase of 28% year over year. The number of PayPal accounts also grew to 65 million, up 19% from the same time last year.

Year-to-date, PayPal`s net revenue was $1.78 billion compared to $1.36 billion last year.

“Merchants love PayPal. Why? Because PayPal delivers three things all merchants need -- new customers, incremental sales, and lower costs,” Donahoe said. “And in tough economic times like this, merchants need PayPal more than ever.”

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