After 3Q Loss, EBay Reorganizes Skype

EBay Inc.'s Skype division has let down eBay executives, but they're confident they can reorganize the troubled Internet phone unit and make it more useful to people outside of the online marketplace.

The online auction site on Wednesday reported a third-quarter net loss of $936.6 million, or 69 cents per share. In the year-ago quarter, it earned $280.9 million, or 20 cents per share.

Executives blamed the first quarterly loss since 1999 on a $900 million write-down in the value of Skype. The charge acknowledged that eBay executives drastically overvalued the $2.6 billion Skype acquisition, completed in October 2005. EBay also paid certain Skype shareholders $530 million to settle future obligations related to the purchase.

Co-founder and chief executive Niklas Zennstrom of Skype, which offers free PC-to-PC phone calls through the Internet, stepped down Oct. 1, when eBay announced the impairment charges. EBay chief strategy officer Michael van Swaaij is acting CEO of the unit.

"We are disappointed -- obviously -- by the write-down, and we're behind in terms of some financial metrics we had originally anticipated," Whitman told The Associated Press in a phone interview Wednesday. "Moving to new management was completely the right thing to do. I actually feel confident in the business longer term."

San Jose-based eBay still exceeded Wall Street's expectations for the quarter ended Sept. 30, thanks to record revenue of $1.89 billion, up 30 percent from the year-ago quarter.

Executives credited record revenue at the PayPal electronic payment division and brisk sales outside of the United States.

Not counting Skype charges, stock-based compensation and other expenses, eBay earned $563.8 million, or 41 cents per share, up 53 percent from $367.4 million, or 26 cents per share, in the year-ago quarter.

On that basis, analysts polled by Thomson Financial expected eBay to earn 33 cents per share on revenue of $1.83 billion.

EBay stock has surged 43 percent in the past year. Shares fell $2.52, or 6.2 percent, to $38.80 at the open of trading Thursday.

Skype, which makes money by charging users for services such as voicemail, call forwarding and calling a landline or cell phone, reported record revenue of $98 million, up 96 percent from a year ago.

It was the third consecutive quarter of profitability for Skype, which had 246 million registered user accounts at the end of the third quarter -- up 81 percent from a year earlier.

Whitman said eBay is more tightly integrating Skype into its core products and expanding Skype's reach through partnerships.

Skype announced a deal Tuesday with News Corp.'s MySpace, which will offer free Internet phone calls to members of the social network starting in November.

David M. Garrity, director of research for New York-based Dinosaur Securities LLC, said deals like the MySpace announcement will be crucial to improving Skype profits and getting more Americans to use the service. More than eight in 10 Skype users are outside of the United States.

"The argument can now be made that Skype is being marketed beyond the eBay community," Garrity said. "People on social networks want to be in touch by any and all means possible, and Skype is ideal for that. People who want to just buy an item (on eBay) without a lot of chit chat won't find it useful."

Whitman said she didn't regret buying Skype and there was little she or other executives could have done differently in 2005 to determine the Luxembourg-based startup's value.

"It's always hard to forecast growth of a two-year-old. It's now a four-year-old and it's almost the fastest startup in the Internet," she said.

Rob Enderle, technology analyst at the San Jose-based Enderle Group, compared the acquisition to IBM Corp.'s $1.25 billion purchase of Santa Clara-based digital phone maker ROLM Corp. in 1984. Big Blue sold part of the struggling unit to German electronics giant Siemens AG in 1990 and Siemens largely dropped the ROLM brand by the end of the decade.

Skype could meet a similarly dismal fate -- unless executives come to understand why the write-down happened and don't make another big misstep, Enderle said.

"They got caught up in the hype and pulled a dot-com foolish mistake," Enderle said of eBay executives. "When you move into an area you know little about, your education is likely to come at legendary cost."

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