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Amazon delivers a very strong quarter

Oct. 27, 2007

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Earlier this week, Amazon surprised everybody by posting a four-fold increase in its net earnings for the third quarter. Amazon's net income grew to over US $80 million, a staggering 313 percent increase when compared with the $19 million it earned during the corresponding third quarter of last year.

Overall, revenue rose 41 percent to $3.26 billion. The average outlook among Wall Street analysts was $3.14 billion in sales.

The eCommerce giant predicted that its fourth quarter operating income would be within the $221 million to $291 million expected range, which fell short of some analyst estimates.

Lately, Amazon shares have been soaring, climbing over the $100 level for the first time in seven years. The stock retreated dramatically on Oct. 24, falling 16 percent to $84.20 in midday trading. That price still represents a more than 100 percent gain in share value over 2006's trading range.

Earlier in 2007, Amazon said it was reducing its spending on technology and content for its sprawling store, a move that has helped pump up profits in recent quarters. Amazon has room to grow into the spending on its technology platform -- including its third-party merchant platform, which accounted for a whopping 32 percent of total sales in the quarter, said Chief Financial Officer Tom Szkutak.

Citigroup analyst Mark Mahaney said in a research note "investors may have gotten ahead of themselves by driving the stock beyond $100, a level that presumes healthy profit margins as well as robust top-line sales growth. The comparisons get harder from here."

Customers continue to embrace Amazon's free shipping offers, including Amazon Prime, said Amazon CEO Jeff Bezos. A growing selection of products -- Amazon added MP3 downloads in the past month and over the summer began selling grocery items -- is helping the company gain new customers, he added.

A highlight of the quarter for Amazon was the release of the seventh and final Harry Potter. Amazon sold 2.5 million copies of the book, a record in new product releases for the eTailer. Amazon sales were up across its global reach, with North American sales increasing 42 percent and international sales rising 40 percent -- boosted by favorable foreign exchange rates.

Amazon didn't offer any insight into the early performance of its Amazon MP3 digital download site, which competes directly with Apple's iTunes Music Store.

The company's Web services initiative continues to attract third-party developers, it said, with 290,000 such developers now signed up for the program -- 25,000 more than the quarter before.

The eTailer continues to benefit from the growth of e-commerce as first-time customers come online for the first time.

Forrester Research analyst Carrie Johnson said "Amazon has built a brand name that people trust and a customer experience that brings them back. As people come online for the first time to shop and buy, they feel comfortable spending on the secure Amazon site."

The eCommerce giant predicted a record fourth quarter, with sales between $5.1 billion and $5.45 billion, representing growth of as much as 37 percent over last year's holiday quarter. That would be an impressive growth rate, especially since early forecasts of overall retail spending are predicting relatively conservative growth in the U.S. as the impacts of the housing slump and high fuel prices weigh on consumers.

Amazon is attracting more retail dollars because it is offering a better shopping experience, Bezos said.

Amazon has been walking the tightrope between attracting customers with discounts and benefits such as free shipping and keeping its bottom line intact since its earliest days, Johnson added. "Balancing growth and profitability has been something it's struggled with from day one," she said.

"Getting products to customers quickly, having the broad selection and having very attractive price points in combination with free shipping -- that package of things, we have been very, very consistent on for a long time. I just think that every year, we get a little bit better," added Bezos.

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Source: Amazon

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