Monday, February 27, 2012 Inc. is struggling to make money as quickly as it spends it

taken from Inc. is struggling to make money as quickly as it spends it, putting the squeeze on the online retailer's latest financial results and crimping its outlook.

Amazon says revenue rose 35% to $17.4 billion, about one billion short of what analysts were looking for in the e-tailer's holiday quarter. Dan Gallagher talks with Stacey Delo about the company's miss and what's ahead.

The Seattle-based e-commerce giant on Tuesday said its fourth-quarter revenue rose 35% from a year earlier, but profit plunged 57% as the company continued to spend on warehouses, technology and its Kindle electronic devices. Amazon's operating expenses rose 38% in the quarter from a year earlier.

Amazon also forecast lower-than-expected sales in the current quarter, estimating first-quarter revenue of $12 billion to $13.4 billion. Analysts had been expecting $13.4 billion. The company said it could report an operating loss for the first quarter.

Amazon's shares fell 8.8% in after-hours trading to $177.31, after ending 4 p.m. trading at $194.44.

For more than a year, the Seattle-based company's formula was quick sales growth—often more than 40%—paired with high spending. Amazon's latest results surprised analysts because while the retailer continued to spend, the revenue growth didn't follow. The fourth quarter, which encompasses the crucial holiday shopping season, is also a barometer of Amazon's performance.

"It's a disappointment against relatively high expectations," said Steve Weinstein, an analyst with ITG Investment Research, adding that Amazon's spending "reflects a company making a lot of investments in their business."

In a conference call with analysts, Amazon's finance chief, Tom Szkutak, defended the company's spending. "We feel very good about the investments that we're making," he said. "We're still experiencing very high growth."

Amazon did widen its operating margin to 1.5%, up from 0.7% a quarter earlier but down from 3.8% a year earlier.

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Amazon also continues to outpace the growth of overall Internet sales, which Forrester Research estimates are rising at roughly 10% a year.

Amazon has evolved from its roots as an online peddler of physical books to an Internet equivalent of Wal-Mart Stores Inc. In recent years, it has also banked on its Kindle devices as a revenue stream. Amazon has sold its black-and-white Kindle reading devices since 2007. Last fall, it introduced the Kindle Fire, a $199 tablet computer that is cheaper thanApple Inc.'s market-leading iPad.

Amazon declined to reveal precise Kindle sales figure for the holiday quarter, saying only that sales of all Kindle devices increased 177% in the holiday period compared with a year earlier. Jordan Rohan, a Stifel Nicolaus analyst, estimated that Amazon sold six million Kindle Fires in the fourth quarter.

Associated Press

For the fourth quarter, Amazon reported a profit of $177 million, down from $416 million a year earlier. Revenue was $17.43 billion, compared with $12.95 billion last year. For all of 2011, Amazon earned $631 million in profit on $48.1 billion in sales, compared with $1.2 billion in profit and $34.2 billion in revenue a year earlier. Operating expenses rose 44% to $47.2 billion. Part of that spending ramp-up comes from Amazon's staggering hiring rate. It ended the year with 56,200 employees, up 67% from 2010.

Amazon is known to sacrifice profits for revenue. Piper Jaffray analyst Gene Munster estimated that the company loses at least $11 per customer on its Prime program, which offers unlimited quick shipping to customers who pay a $79 annual fee. Online-retail analysts estimate that Amazon recoups some of that cost because Prime members triple their spending on Amazon after joining the program.


The retailer also sells its Kindle gadget for a loss, losing as much as $15 per device, Mr. Munster estimated. Amazon makes up for that by selling digital books, music, software and video on those devices.

Amazon can also offset some losses by letting third-party retailers sell products on its marketplace. Mr. Szkutak said Amazon has made improvements to the marketplace to help both buyers and sellers. "It was great for the bottom line," he said.

Analysts said Amazon's disappointing fourth-quarter revenue came from its core retail business because Kindle sales appeared strong. Eric Best, chief executive of Mercent Corp., which helps retailers such as Office Depot and the Home Shopping Network sell goods on Amazon and other sites, said overall online-retail sales were slightly below what sellers were hoping for.

Mr. Best said part of that was because of general economic weakness, while generally good weather caused more people to shop at brick-and-mortar retailers.