Cautious optimism -- that's the message


(EBAY) - Get Report

is sending to Wall Street.

And the Street seems to like it.

eBay reassured investors late Wednesday that it's capable of meeting the challenges coming its way, underscoring the message with better-than-expected third-quarter earnings. But it kept a sober tone about the future, offering lower guidance for the year and being clear that more work remains ahead for it to keep revenue and profit growing.

Investors have liked what they heard, pushing eBay's stock up $1.82, or 6.4%, in recent Thursday trading.

The e-commerce giant reported earnings of $281 million, or 20 cents a share, for the quarter ended Sept. 30. A year ago, eBay posted a profit of 18 cents a share. On a non-GAAP basis, eBay posted 26 cents a share in the quarter.

Analysts surveyed by Thomson Financial were looking for a 16-cents-a-share profit on non-GAAP basis and a 24-cent profit on a GAAP basis.

eBay also beat revenue forecasts, bringing in $1.45 billion in the third quarter, up 31% on year and above the $1.43 billion forecast.

Even more important, eBay showed that its efforts to address some of the weaknesses that had investors concerned are taking root. Its core auction-driven Marketplace had slowed as some sellers moved their inventory over to eBay Stores, which are more likely to offer fixed prices that can be less appealing to eBay's bargain-hunting audience.

Last quarter, eBay tried to address that by raising inventory fees at its eBay Stores. It seems to be working. eBay CEO Meg Whitman said in the conference call Wednesday that she's "cautiously optimistic" that the strategy is working.

"We're seeing less identical items at relatively uncompetitive prices, which means that the buyer experience is improving," Whitman said. "What we are seeing is more buyers at higher conversion rates, although it is very early."

The Street's reaction was a feeling of encouragement. "We estimate core U.S. listings accelerated in the third quarter, rising approximately 10% year on year, showing early signs that eBay's recent pricing moves may be providing the desired rebalancing of inventories on its sites," wrote Marianne Wolk, an analyst at Susquehanna Financial, which has no underwriting relationship with eBay.

But eBay also lowered its 2007 revenue guidance, saying revenue would grow between 17% and 21% in the year. That was down significantly from the 25% growth that the Street had been expecting for next year. "On the bottom line, we believe we can grow earnings per share by at least 20% versus 2006," said eBay CFO Bob Swan.

Though Wall Street never likes to hear about lower guidance, analysts who have had a conservative view of eBay's outlook took the news in stride.

"The risk profile on growth remains high," wrote Jeetil Patel, an analyst at DeutscheBank, who maintained his hold rating on the stock. "This lowered outlook comes as no surprise given the slowing growth at the company, under-performance at Skype and declining purchase frequency." DeutscheBank has no current underwriting relationship with eBay.