By Geoffrey A. Fowler 
   Of THE WALL STREET JOURNAL

EBay Inc.'s (EBAY) profit fell 29% and revenue declined 4% as the company continued its pursuit of a turnaround in a harsh climate for consumer spending.

Still, the e-commerce company outperformed analyst expectations, as the decline in eBay's core marketplace leveled off and its PayPal online-payments unit grew strongly.

The results drove eBay's shares up 4.7% to $20.37 in after-hours trading, after they closed at $19.45, up 2.7%, in 4 p.m. EDT trading on the Nasdaq Stock Market.

EBay posted quarterly profit of $327 million, or 25 cents a share, down from $460 million, or 35 cents a share, a year earlier. Revenue was $2.1 billion, down from $2.2 billion, as customers continued to turn elsewhere for online purchases.

"We drove solid second quarter results, with strong momentum and market-share gains at PayPal and continued stabilization in our core eBay business," said eBay Chief Executive John Donahoe, in a prepared statement.

The results were buoyed by growth at PayPal, where revenue increased 11% and the number of active registered accounts grew 20% during the quarter.

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There were also signs that changes Donahoe has made in eBay's marketplace - which accounts for the majority of its revenue - were taking hold. The business's revenue decline slowed to 14% in the second quarter from an 18% fall in the first quarter. The drop in the company's gross merchandise volume, the total amount of goods that eBay sold excluding vehicles, also slowed to 10%, after falling 16% in the previous quarter.

It still looks like it's a long turnaround for eBay [but] they're getting worse less quickly," said Jeffrey Lindsay, an analyst with Sanford C. Bernstein. He said he is looking for growth in eBay's total active users, but that figure grew less than 1% versus the first quarter.

Some small merchants say eBay's marketplace has stopped working for them. Travis Hill, who runs Last Chance Records in Little Rock, Ark., said he now averages about half of the eBay sales he did at this time last year. He blames a recent change in eBay's search engine, called "best match," for reducing his exposure on the site.

"EBay is nearing the point of no longer being a viable business tool for us," said Hill. He added that he also sells merchandise through Amazon.com Inc. (AMZN), and is actively developing his own site for his company.

EBay issued cautious guidance for the third quarter that was in line with analysts' expectations. The company forecast revenue in the range of $2.05 billion to $2.15 billion, and earnings per share of 22 cents to 24 cents.

The company also responded Wednesday to a lawsuit filed this week by retailer Steven Madden Ltd. (SHOO) over the potential sale of counterfeit watches in EBay's online marketplace. EBay Deputy General Counsel Mary Huser said Steve Madden should have first reported the issue to eBay before filing "unnecessary litigation."

-By Geoffrey A. Fowler, The Wall Street Journal; 415-765-8258