eBay Back on Track

The company beats earnings expectations as former trouble spots spur growth.
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Updated from 4:17 p.m. EDT

It's a little bit like old times at

eBay

(EBAY) - Get Report

. The company's second-quarter report beat the Street's estimates by 4 cents a share, with a profit of $291.6 million, or 21 cents a share.

The online-marketplace outfit also ratcheted up its earnings and revenue expectations for the rest of the year.

Investors cheered the results after-hours; the stock was recently up more than 12% to $39.14 on Instinet.

On a pro forma basis, eBay's second-quarter net income was $307.2 million, or 22 cents a share, above the Street numbers of 18 cents a share. None of the analysts surveyed had projected a profit above 18 cents on a GAAP basis and 19 cents on a pro forma basis.

Revenue rose 40% to $1.09 billion, above the top end of the range of eBay's previous guidance and ahead of the consensus number of $1.04 billion. The strongest revenue growth came from eBay's international marketplaces and from PayPal, both of which rose 51% from the year-ago quarter.

Also impressive was eBay's operating margin. GAAP operating income of $379 million was equal to 34.9% of revenue, well above the operating margin of 32.5% in the previous quarter and 32.8% in the year-ago quarter. The pro-forma operating margin was even higher, at 37.4%.

Revenue from eBay's core U.S. marketplace division grew 27% on year, a significant rise from the 20% growth rate that had troubled investors in the first quarter, and the fastest growth rate in three quarters.

Revenue from Germany was up 21%, an acceleration from the rate of previous quarters, eBay said.

"If there were two markets that drove the results, it was the U.S. and Germany," says Rajiv Dutta, eBay's CFO in an interview. "What's behind the growth is the community outreach and marketplace management we've been speaking about for a while. Both of those markets have been areas of focus for us."

Dutta says eBay implemented product changes, pricing changes and promotions that spurred activity in both markets. "In the U.S., the fastest growth we've seen is in the store format," he says. "Good conversion rates and higher average selling prices benefits sellers because it means eBay is becoming a more efficient selling platform for them."

Another contributor to eBay's strong quarter was its PayPal online-payments system. Previously seen as a payment method for eBay's auction site, PayPal is now seeing about half of its growth come from non-eBay small businesses. With little fanfare, eBay has been tailoring PayPal to meet the needs of small and midsize merchants - allowing, for example, the service to process payments whether made through email, the phone or by fax.

"Merchants have been responding extremely well to PayPal," Dutta says.

In a sign that the company believes it's getting a strong footing back, eBay substantially boosted its guidance for the full year. eBay expects 2005 GAAP profit to be 77 cents or 78 cents a share, up from a range of 71 cents to 73 cents. Pro forma profit is projected to be 82 cents or 83 cents a share, up from eBay's earlier range of 76 cents to 78 cents.

The company forecast revenue to be between $4.34 billion and $4.41 billion, up from its previous range of $4.27 billion to $4.36 billion.

eBay's guidance doesn't include any contributions from

Shopping.com

(EBAY) - Get Report

, an acquisition eBay plans to close in the third quarter. Shopping.com posted a $3.9 million profit in the first quarter on $29 million in revenue.