Cost for buying Skype shows up in EBay loss

EBay Inc. dialed up a steep third-quarter loss Wednesday, as the accounting effect of paying too much for the Skype Internet calling service offset strong growth in its core online payment and auction businesses.

The $936 million in red ink was the San Jose company’s second-ever loss. Earnings were dragged down by a $1.4-billion one-time charge to write down the value of its Skype acquisition and settle its remaining financial obligations to Skype shareholders.

Excluding the charge, EBay earned $564 million, or 41 cents a share, compared with net income of $339 million, or 20 cents, a year earlier.

Revenue grew 30% to $1.89 billion. Key drivers included sales increases in EBay’s auction business, which gained 26% to $1.32 billion, and its PayPal online payment business, which surged 35% to $470 million.

“They had a very solid quarter,” said Tim Boyd, an analyst at American Technology Research.

Investors continue to be optimistic about EBay, bumping the company’s shares up $2, or 5.2%, to $40.60 in regular trading. The shares rose an additional 15 cents in late trading after the earnings release.

Skype gained 26 million users in the quarter to total 246 million, but posted a meager $98 million in sales.

EBay bought Skype in 2005 for $2.6 billion in cash plus as much as $1.7 billion in incentive payments if executives met revenue, profit and membership targets.

Implying that the purchase had not paid off, EBay two weeks ago wrote down the value of Skype by $900 million. It also agreed to pay certain Skype shareholders $530 million to extinguish its promise for incentive payments.

“Clearly we are disappointed in the impairment charge,” EBay Chief Executive Meg Whitman said in a conference call.

Whitman said executives had focused too much on trying to grow Skype’s revenue and profit at the expense of quality.

“There was not as much focus on delighting the user,” said Whitman, who added that EBay planned to invest more to improve the service. “Skype is a great business with a long-term potential.”

Whitman also said EBay planned to spend more to improve its auction site, attract new buyers and entice existing ones to buy more often. The company also plans to cut the fees it charges sellers to list items.

“Some are reading the fee drop as tacit admission that EBay doesn’t have the pricing power over their users as much as they used to,” Boyd said. “Growth in the number of new and active users is very tepid. But if they can accelerate that, they can really be a big growth story.”

alex.pham@latimes.com