PayPal's growth offsets slower sales for eBay

The turnaround effort at eBay Inc.'s online marketplace is progressing slowly in the U.S., but the company's quarterly earnings were buoyed by international sales and increased use of its PayPal online-payments service.

The San Jose, Calif., Internet company reported its second-quarter profit rose 26% on the back of a 6% increase in revenue.

EBay said a turnaround in its once-high-flying marketplace was "on track," with the total volume of goods, excluding autos, sold through eBay increasing 13%. Sales were particularly strong internationally up 20% but they rose only 2% in the U.S.

"We are not satisfied with our U.S. results," said eBay Chief Executive John Donahoe in a call with investors. "While clearly we saw consumer spending soften during the quarter and the strengthening dollar hurt [gross merchandise volume] exports from the U.S., we aim to do better in the market."

Mr. Donahoe said the changes the company had made to the marketplace earlier in the year, such as shifting listings from separate stores to the core website, would have a positive impact in the coming months.

"The international business is looking better than we were expecting,'' said Lazard Capital Markets analyst Colin Sebastian. He expected the meager growth in the U.S., but was still concerned that the company was losing market share to rivals like Amazon.com Inc.

EBay "is still a marketplace that is challenged and in transition, and we need to see more progress over time," Mr. Sebastian said.

U.S. eBay sellers may have had some additional challenges due to recent changes, said Scot Wingo, CEO of ChannelAdvisor, which helps brands sell on eBay and other sites. He said his company's large retail clients saw sales decline 3% on eBay in the second quarter, while their same-store sales on Amazon.com Inc.'s third-party marketplace increased 68%. (EBay is a minority investor in ChannelAdvisor.) "EBay continues to have structural problems with the buyer-facing aspects of the business around merchandising and search,'' said Mr. Wingo.

EBay's brightest spot was its online-payments unit, where revenue climbed 22% to $817 million. Compared with the same quarter last year, PayPal recorded 16% more active registered users, and a 28% increase in total payment volume.

"PayPal is the growth engine,'' said Sandeep Aggarwal, an analyst at Caris & Co. ``It has virtually no visible threat so far from the competition.'' Still, he said investors have largely priced in the potential of PayPal into the value of the stock.

While e-commerce as a whole has proven more resilient to recession than traditional retail, investors have soured on the sector in recent months and on eBay in particular.

Due to concerns about the company's marketplace, eBay's share price is down about 25% since the beginning of April, outpacing overall declines in the Nasdaq market.

In after-market trading, eBay's shares were up about 3% to $20.76, after closing Wednesday down about 3% to $20.17.

EBay's second-quarter profit rose to $412 million, or 31 cents a share, from $327 million, or 25 cents, in the year-earlier period. Revenue was $2.22 billion, up from $2.1 billion a year ago.

Still, the company pulled back on its 2010 outlook because of the stronger dollar. EBay now expects adjusted earnings of $1.60 to $1.65 a share, down three cents, and it cut the upper end of its revenue forecast by $100 million.