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Amazon delivers lower profits, stock drops 12 percent

October 26, 2005

After the close of trading yesterday, reported lower quarterly earnings as a result of a legal settlement and the company set sales target that initiated fears of lower growth. In NASDAQ trading, Amazon's stock was down 12 percent this morning.

Analysts also said profit margins were thinner, as Amazon continued its plan to keep its retail prices lower, and offer discounted shipping to increase sales in an already increasingly competing environment.

The Internet retailer, which began as an online bookseller and has become the second-most-popular eCommerce Web site behind eBay, forecast revenue below some Wall Street expectations for the holiday season, when it generates the bulk of its sales.

"It confirms what I've been thinking about revenue deceleration," said Martin Pyykkonen, an analyst at Hoefer & Arnett Inc., who noted that Amazon anticipated fourth-quarter sales to increase between 13% and 24%, well below its 31% sales jump in the fourth quarter of last year.

Amazon said third-quarter net income fell to $30 million, or 7 cents per share, compared with $54 million, or 13 cents per share, a year earlier.

Analysts on average were expecting net earnings of 9 cents per share, but most had not taken into account a $40 million patent lawsuit settlement, according to Reuters Estimates.

Excluding that settlement and stock-based compensation, Amazon earnings were 16 cents per share, compared with Wall Street targets of 15 cents, according to Reuters Estimates.

Revenue grew to $1.9 billion from $1.5 billion a year earlier.

Sales in North America -- the company's biggest market -- rose 28%, in what the company called its fastest growth rate in more than four years.

The company sold more than 1.6 million copies of Harry Potter and the Half-Blood Prince in the quarter, although the heavily discounted book was a "break-even" event, Amazon said.

Analyst Anthony Noto of Goldman, Sachs & Co. in a research note to clients said Amazon's third-quarter operating margin of 5.9%, excluding one-time items, were below his estimates and were the lowest the company had posted in more than seven quarters.

Amazon said its operating profit margin was 6.5%, matching lows hit in the previous two years.

"That 6% plus or minus is about where they're stuck at," Pyykkonen said. Amazon Chief Financial Officer Tom Szkutak said the revenue forecast was depressed by more than $100 million by the strengthening of the U.S. dollar, which cuts the value of overseas sales.

Szkutak also said he expected more people to sign up for the retailer's new Amazon Prime discount shipping program as the holidays draw near.

Betting that it could strengthen customer loyalty and raise sales, the company unveiled Amazon Prime in February amid investor and analyst concern that the program, which provides unlimited two-day shipping for an annual fee of $79, would boost expenses and eat up profits.

"From a cost perspective, this is the first time we'll have Amazon Prime," said Szkutak, who added that he was "cautiously optimistic" about the holiday quarter.

"We think [Amazon Prime] will be great for customers, but we think it will be expensive."

During the quarter, Amazon's net shipping loss increased 15% to $47 million, primarily as a result of its free shipping offers and Amazon Prime, the company said.

Amazon trades at 46 times its projected 2006 earnings per share -- below that of online media company Yahoo Inc. at 47 but at a premium to Web auctioneer eBay Inc. at 39 -- suggesting that many investors view it less as a traditional retailer and more as an Internet company.

Brick-and-mortar retailers trade at lower projected price-to-earnings ratios, with Wal-Mart Stores Inc. at 17 times projected 2006 earnings per share and Target Corp. at 21.

Looking ahead, Amazon said it expects fourth-quarter sales to be between $2.86 billion and $3.16 billion. The midpoint of that range, $3.01 billion, lags the Wall Street consensus target of $3.08 billion.

Source: Computer World

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