EBay outlook hammers shares, profit rises

SAN FRANCISCO (Reuters) - EBay Inc (EBAY.O) on Wednesday provided a cautious near-term outlook that reflected concern over a weak U.S. economy and changes it has been making to its auction business, sending its shares down 7 percent.

Investors have come to count on eBay raising its outlook each quarter, and were disappointed when the company said that revenue in the current quarter would be lower than expected, while leaving its full-year projections relatively unchanged.

That overshadowed a 22 percent gain in second-quarter net profit that beat Wall Street estimates, helped by a surge in listings and share buybacks.

"It's ancient history now, but in past years, investors knew eBay would start out each year conservatively and raise their outlook more and more as each quarter went by," Global Crown Capital analyst Martin Pyykkonen said.

"What eBay is saying now is, 'We don't want to go out on a limb,'" Pyykkonen said. "The economy is working against them."

Moreover, Bernstein Research analyst Jeffrey Lindsay said investors may have oversized expectations about how online sellers can perform in the weak economy.

Average selling prices for eBay fell in the second quarter due in part to more shoppers in the United States and Britain shifting to lower-priced goods, executives said.

The company has been lowering upfront listing fees to attract more sellers in response to slower growth in its main auction business over the past three years.

The tinkering with fees and efforts to improve trust between buyers and sellers are aimed at reviving growth amid competition from Amazon.com Inc (AMZN.O) and craigslist.com.

Second-quarter net income rose to $460 million, or 35 cents per share, from $376 million, or 27 cents a share, a year earlier. The company bought back 19 million shares worth $566 million in the quarter, helping to lift earnings per share.

Revenue rose 20 percent to $2.2 billion, helped by a 27 percent rise in international sales, while U.S. sales grew by only 12 percent. Analysts expected $2.17 billion, on average.

Excluding stock option expenses and merger-related costs, earnings were 43 cents per share, 2 cents above what analysts had expected on average, according to Reuters Estimates.

John Donahoe, who took over as chief executive in April, highlighted strength at its payment service PayPal, where revenue grew 33 percent to $602 million. At eBay's Web-based call service, Skype, revenue rose 51 percent to $136 million.

LISTINGS SURGE, USERS STAGNATE

For the third quarter, eBay said it expects revenue of $2.10 billion to $2.15 billion, and adjusted earnings per share of 39 cents to 41 cents. Those were below average analyst projections of 41 cents per share on revenue of $2.17 billion.

For the full year, eBay said adjusted earnings per share would be in line with the $1.74 expected by Wall Street.

The company expects 2008 revenue of $8.8 billion to $9.05 billion, up slightly from a range given in April of $8.7 billion to $9.0 billion. But that is on the low side of Wall Street estimates ranging from $8.9 billion to $9.24 billion.

"Why set yourself up with a high hurdle in the current economic environment?" said RBC Capital analyst Stephen Ju.

EBay is having trouble attracting new users beyond the discount shoppers attracted to its auction format for which it's famous. Active users rose a mere 1 percent in the quarter, even as listings surged 19 percent from a year ago.

In its auctions, average selling prices fell 6 percent due in part to discounts in Germany, a shift by U.S. and UK consumers to lower-priced goods, and efforts to curb fraudulent higher-priced listings, Chief Financial Officer Bob Swan said.

On Monday, eBay welcomed a ruling by a New York judge that Tiffany & Co (TIF.N) could not force Amazon to police its own site for knock-off Tiffany jewelry. The ruling, which should stave off similar U.S. lawsuits, said trademark holders, not third-party operators, are responsible for protecting brands.

But San Jose, California-based eBay is appealing a recent ruling in France ordering it to pay $61 million to LVMH (LVMH.PA) over sales of fake handbags and perfume on the site.

EBay shares are valued at 16 times projected 2008 profit, below Amazon at 45 and Internet companies Google Inc (GOOG.O) and Yahoo Inc (YHOO.O) at 26 and 47 times, respectively.

EBay shares fell 6.7 percent to $26.21 in extended trade from a close of $28.10, up 4.5 percent. They are off 20 percent this year, falling more or less steadily since early April.

(Additional reporting by Eric Auchard; Editing by Braden Reddall)