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Updated from Oct. 18

eBay

(EBAY) - Get eBay Inc. Report

posted a 10% earnings gain for its third quarter but the online auction's guidance kept alive concerns about the company's core domestic business.

The San Jose, Calif., Internet auction giant made $281 million, or 20 cents a share, for the quarter ended Sept. 30. That's up from the year-ago $255 million, or 18 cents a share. Sales rose to $1.45 billion from $1.11 billion a year earlier.

Excluding certain costs, latest-quarter earnings were 26 cents a share.

Analysts surveyed by Thomson Financial were looking for a 24-cent profit on sales of $1.43 billion.

Shares of eBay were up $1.02, or 3.6%, to $29.51 in early Thursday trading.

"Q3 was a very good quarter for the company and a continuation of the strong earnings growth we delivered throughout the first half of the year," said CEO Meg Whitman. "As our results demonstrate, we are executing on our strategy to grow our Marketplaces, PayPal and Skype businesses individually and collectively to deliver greater value to our community of users and to our shareholders."

eBay said it expects to make 27 or 28 cents a share on a pro forma basis for the fourth quarter, on revenue of around $1.65 billion. Analysts were looking for a 29-cent profit on sales of $1.66 billion.

eBay's third-quarter earnings growth was due in part to a drop in the company's tax rate to 26% from 34% last year. Earnings before taxes fell by almost 2%.

And while revenue from its PayPal business grew by 41%, sales at eBay's core online marketplace grew by 22%, which didn't allay investor concerns about the company's main business.

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"The question is whether they are able to do something to regenerate their core U.S. business," said Martin Pyykkonnen, an analyst with Global Crown Capital. "International markets may be promising in the long run, but they are also very competitive at this point."

The stock has fallen by one-third this year as the company's efforts to expand its marketplace business in different locations around the world has been met with fierce local competition, even as domestic growth has slowed.

In a conference call held later Wednesday, Whitman said the company would continue to press its international strategy and was adamant about persevering in its China efforts. "We are committed to China for the long term," Whitman said. "We think it holds great potential."

But she refused to go into detail about the different strategies the firm may be considering in China, such as potentially partnering with portals. "In China, we believe we are maintaining share in a highly competitive market," said CFO Bob Swan.

Whitman was also upbeat about eBay's efforts to "rebalance" its marketplace business by bringing about a more favorable ratio of core auction sellers, as opposed to store sellers, but cautioned that it was too soon to tell.

"Since most actions were initiated late in Q3, we expect to have more visibility after the fourth quarter, but we are cautiously optimistic and remain confident that these changes will help rebalance our marketplace," she said.

While the jury is out on its online marketplace, eBay's PayPal and Skype business lines continued to show signs of impressive growth. PayPal, which now accounts for 24% of total eBay revenue, grew its total payment volume by 37% year-over-year to $9.1 billion.

Skype added nearly 23 million users during the quarter, brining its total to 136 million users in more than 200 countries. "There are few, if any, businesses that can claim such mass global appeal in such a short period of time," Whitman said.

However, Whitman said that monetizing Skype's growing user base was not a priority for the company. Instead, eBay would emphasize acquiring new users for the service and hopes to speed up the growth of its marketplace business as a result of increased communication between buyers and sellers due to the free communication service. "We are not focused on revenue per user in 2007, because the business is too young to do that," Whitman said.

Despite pockets of strength, investors are likely to remain skeptical of the company until it can demonstrate that it has rejuvenated growth in its bread-and-butter marketplace business. eBay's decision to pass up squeezing more money out of each Skype user in the hopes that it can increase the odds of sparking the marketplace business speaks to the importance of this objective.

In this regard, its rationale for the Skype acquisition last year remains to be justified.

Meanwhile, eBay's crucial oversees efforts remain mixed, and its eventual triumph in those markets is anything but certain. "People often consider eBay as a safe internet stock, but that is based on the assumption that they will be able to do what they did domestically in international markets," says Pyykkonnen. "They may end up as a player internationally, but there is no guarantee that they will be able to lock down those markets the way they did at home."