Amazon profits fall but top estimates

NEW YORK (CNNMoney.com) -- Amazon.com Thursday said profits fell for the critical holiday selling season, but the numbers still beat Wall Street forecasts.

The Seattle-based online retailer reported net income of $98 million, or 23 cents a share, for the fourth quarter ended Dec. 3, down from earnings of $199 million, or 47 cents a share, a year earlier.

In its earnings report, Amazon cited higher taxes during the quarter for the drop in year-over-year profits.

Sales jumped 34 percent to $3.99 billion in the quarter as shoppers took advantage of its unlimited free-shipping incentives.

Analysts, on average, were expecting earnings of 21 cents a share for the quarter and revenue of $3.76 billion, according to First Call.

"All in all, it looks like this was a very balanced quarter for Amazon. Media sales were up and electronics sales did well too," said Robert Toomey, analyst with E.K. Riley Advisors.

"Those with a very short view of Amazon can pick apart some issues, such as continued gross margin pressure. But those with a long-term view will see that this was a solid quarter. The tax impact, in my view, was as expected," he said.

Amazon said worldwide electronics and other general merchandise sales surged 55 percent to $1.40 billion in the fourth quarter, representing 35 percent of worldwide net sales.

Further, media sales related to Amazon's Unbox digital download service grew 25 percent in the quarter.

In a conference call with analysts, CEO Jeff Bezos said the service was getting strong response, especially from customers looking for TV episodes and "hard-to-find" videos.

Regarding its digital initiative, Bezos said Amazon has "a bunch of things in the pipeline that we'll be rolling out over time."

However, others analysts had a more cautious take on Amazon's results.

Hamed Khorsand, analyst with BWS Financial, said that although Amazon's free shipping for its fee-based Amazon Prime loyalty program members and other such discounts successfully boosted revenue over the holiday period, the benefits are not yet trickling down to the bottom line.

"Amazon's gross margins in the U.S. were down slightly and quite a bit in its international operations because it introduced the free-shipping incentives," he said.

Investors appeared to have similar concerns. Shares of Amazon (Charts), which competes with other leading retail e-commerce sites like Wal-Mart's (Charts) walmart.com and eBay (Charts), slipped in after-hours trading after gaining 2.7 percent in regular trading on Nasdaq.

During a conference call, Amazon.com's chief financial officer Tom Szkutak tried to weigh the dip in gross margins against the various initiatives Amazon implemented in the quarter to boost sales.

He said margins will be compromised somewhat as Amazon continues to expand into new categories, add more unique product selections and offer more competitive prices.

"This will drive up our in-stock position and we will see some margin volatility," he said.

Even so, industry experts don't blame Amazon for wanting to expand into new markets and grab a bigger piece of the e-tailing revenue, which last year reached $102 billion.

One of its latest ventures is the recently launched Endless.com Web site, which sells shoes, bags and other accessories.

For the month of February, Amazon has set a "negative $5" overnight shipping promotion, or rebate. It's a move that has drawn some criticism from analysts who see it as another negative for profits.

Bezos told analysts during the call that it was an unusual promotion, but he felt it was an effective way to introduce the site to its customers. He also said that Amazon hasn't yet considered expanding that offer to Amazon.com customers.

"I suppose the positive side of the story is that Amazon capital expenditure has plateaued. Amazon said it'll spend about $250 million this year, which is flat compared with 2006," Khorsand said. "So as sales grow, hopefully we'll see some trickling down to the net income line."

Amazon's sales in its North America market - which includes the United States and Canada - were $2.21 billion, or up 31 percent versus the year-earlier quarter.

But international segment sales through its U.K., German, Japanese, French and Chinese sites grew a more robust 37 percent versus last year to $1.78 billion.

Looking ahead, Amazon said it expects sales of $2.85 billion to $3 billion for the first quarter, which would be up 25 percent to 32 percent from a year earlier.

That compares with analysts' average forecasts of $2.75 billion for the first quarter.

Though Amazon did not give earnings per share guidance, it said it expects operating income of $82 million to $122 million for the first quarter, or a range between an increase of 22 percent and a 16 percent decline compared with the same period last year. This guidance includes $38 million for stock-based compensation and other items.

For the full year, the company expects operating income to be between $355 million and $505 million, or a range between an increase of 30 percent and decline of 9 percent compared to 2006.

The full-year guidance includes $165 million for stock option expenses and other items. Analysts, on average, forecast a profit of 63 cents a share for the full year 2007.

The company said net sales for the full year are expected to be between $13 billion and $13.7 billion, or up between 21 percent and 28 percent compared with 2006. Analysts expect full-year sales, on average, to be $12.5 billion.

• Google's halo dims for some e-tailers
• How Zappos became No. 1 in online shoes
• Online surprise: Penney, Sears gain on Amazon

- Robert Toomey personally owns shares of Amazon. His firm does not have an investment banking relationship with Amazon. Hamed Khorsand does not own shares of Amazon and his company does not have an investment banking relationship with Amazon.