Kevin Kelleher
SAN JOSE, Calif. -- eBay(EBAY Quote - Cramer on EBAY - Stock Picks) has a clear message for analysts: We haven't lost our fiscal minds.
After warning in an earnings report last month that its operating margin would fall to 34% this year from 35% in 2004, some had started to wonder. (Well, no one was accusing eBay of fiscal recklessness, but it seemed clear that eBay had slipped from its record of nearly flawless financial performance.) After all, eBay is betting $300 million this year on new initiatives, even as its revenue growth rates were starting to fade in core markets like the U.S. and Germany. And, as many investors have learned the painful way, a single percentage-point drop in margins can be the first step on a slippery slope into the valley of earnings tears. So at its 2005 analyst day in San Jose, eBay executives hammered on the message that these bold investments -- to make eBay a dominant force abroad, especially in China, and to make PayPal a widely used payment system outside its Web site -- are a necessary deviation from the old playbook, not a new deadly playbook. "It's entirely appropriate to make these lumpy investments to position eBay to deliver the full potential of its business," Rajiv Dutta, eBay's chief financial officer, told the crowd of a couple hundred analysts and money managers as he lingered over a slide showing long-term operating profits hovering between 35% and 40% for eBay and between 20% and 25% for its PayPal subsidiary. "This is the exact same chart I showed you at last year's analyst day," Dutta said. "That margin capability is completely intact." In the Q&A session, analysts were hardly incredulous, but they did tap on what they thought might be stress fractures in the company's financial structure. Dutta tried to calm fears that an announcement Monday that eBay would expand its customer service to give a more human touch to its customers would mean even lower margins. "There's no change to our guidance as a result of our increased costs to customer support."
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