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For eBay, Good Isn't Good Enough

The e-commerce giant beats expectations but its guidance is not as high as analysts forecast.

Updated from July 21


(EBAY) - Get eBay Inc. Report

blew through analysts' quarterly estimates after the close Wednesday. But as

feared, the company offered guidance that wasn't up to Wall Street's heady forecasts and shares tumbled, recently down $2.89, or 3.8%, to $73.71, although off their earlier low of $71.45.

The online auction giant earned $190.40 million, or 28 cents a share, in the second quarter. The company's earnings more than doubled its profits of $91.87 million, or 14 cents a share, from the same period last year.

eBay's revenue rose 52% to $773.41 million.

Analysts were expecting earnings of 25 cents a share on sales of $769.33 million, according to Thomson First Call. In April, eBay

said that it expected to earn 24 cents a share on up to $760 million in revenue in the second quarter.

But the company's outlook for the third quarter and the rest of the year wasn't as bright as analysts had hoped. For the third quarter, eBay forecast earnings of 24 cents a share on $770 million in sales. In contrast, analysts were looking for earnings of 25 cents a share on revenue of $777.49 million.

Meanwhile, the company projected full-year earnings of $1.10 a share on $3.185 billion in sales. The company's earnings guidance is up four cents a share from its previous guidance, meaning that it effectively kept its second-half outlook unchanged, considering it beat its own second-quarter forecast by that same four cents a share. Interestingly, when eBay broke out its quarterly guidance, it did raise its per-share estimates for the fourth quarter by 1 penny to 30 cents a share.

Still, the company's guidance is below Wall Street's forecast. Analysts had predicted that eBay would earn $1.11 a share on $3.21 billion in sales this year, according to Thomson First Call.

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eBay's revenue growth in the quarter was nothing to sniff at, boosted by strong domestic and overseas sales. But while eBay's business is still growing at a strong clip, it's clearly slowing. That's a troubling sign for a company whose heady valuation -- it recently traded for as much as 74 times predicted 2004 earnings -- is dependent on its future growth.

Revenue from the company's core U.S. auction site, for instance, grew at a 32% clip in the quarter. A strong rate to be sure, but it marked the slowest quarterly growth for the business segment in more than two years. In the second quarter last year, eBay's domestic auction revenue grew by 45%.

Similarly, despite the company's recent expansion into

India and

China, the growth rate of its international auction business was nearly cut in half from the second quarter last year. In the just-completed quarter, eBay's international transaction revenue grew by 76%. Last year, that business segment's sales grew by 146%.

Perhaps just as disturbing for a company valued for its rapid growth, several of its key financial metrics actually declined on a sequential basis from the first quarter. The company's net income, for instance, shrank 5% from the previous quarter. Revenue from eBay's core U.S. auction site fell by about 2% vs. the first quarter to $319.11 million. And the value of all the goods sold dropped by less than 1% to $8.01 billion.

Each of those declines is a relative novelty for a company known for growing revenue and earnings, not only year to year, but from quarter to quarter.

On this sequential basis, the company's payments and international segments also showed slowing growth. Revenue from eBay's PayPal division grew by just 2% from the first quarter to $158.82 million. In contrast, PayPal's revenue grew by 7% sequentially in the second quarter last year.

Likewise, sequential sales growth from eBay's international auction sites slowed to 6%, less than half the 13% quarter-over-quarter growth recorded in the second quarter last year.

On a conference call with analysts, eBay CEO Meg Whitman said the company is increasingly being adopted by everyday consumers. As the company's business becomes more mainstream, she said, its financial results have increasingly reflected the seasonality seen by brick-and-mortar retailers.

"There's no question that our seasonal trends are more pronounced," Whitman said.

The company is looking for much stronger growth in its fourth quarter this year and first quarter next year, noted CFO Rajiv Dutta. Still, that may be little consolation to investors. Increased seasonality is generally a strong sign of a maturing business.

eBay's stock closed regular trading at $76.60, off $3.35, or 4.2%.