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Fri, Feb 01, 2008 - Page 10 News List

Margin slip casts a cloud on Amazon's profit jump

POOR VISIBILITY Analysts warned that the outlook for Amazon's margin was cloudy after sliding last quarter over rising technology investment and shipping costs

NY TIMES NEWS SERVICE , NEW YORK

Amazon.com, the leading online retailer, had a lot of good news in its financial report on Wednesday, but it was overshadowed by just a small bit of bad news.

The good news was a strong holiday shopping season that was more robust than in years past as a hearty demand for books, electronics and consumer goods pushed revenue up 42 percent in its fourth quarter and more than doubled profits. And despite a slowing national economy, the leading online retailer said it expected strong sales growth this year.

The bad news was lower profit margins in the fourth quarter along with a disappointing outlook for those margins.

Amazon's gross margin fell to 20.6 percent during the quarter, from 21.3 percent, as the company continued to invest in new technology and in its costly free shipping program, Amazon Prime.

Company executives tried to reassure analysts in a conference call after the announcement.

"The growth we're seeing is broad-based," CEO Jeff Bezos said.

"What we're seeing right now reflects all the work we've done in terms of our customers," chief financial officer Tom Szkutak said. "Our business is fine."

Amazon said fourth-quarter net profit rose to US$207 million, or US$0.48 a share, from US$98 million, or US$0.23 a share, in the same period last year. Sales rose to US$5.67 billion, from US$3.99 billion.

Analysts polled by Thomson Financial had forecast a profit of US$0.48 per share on revenue of US$5.37 billion for the quarter.

While fears of a slowdown in consumer spending have been causing jitters on Wall Street, Amazon issued a confident sales forecast that beat analysts' estimates. The company forecast sales in the current quarter of US$3.95 billion to US$4.15 billion, a rise of 31 percent to 38 percent from the first quarter of last year and better than analysts' forecasts of US$3.92 billion.

The company said operating income was expected to grow as much as 38 percent in the first quarter. Sales for the entire year are forecast to rise 26 percent to 33 percent over last year.

Mark Mahaney, an analyst with Citigroup Global Markets, wrote in a research note after the results that Amazon's fundamentals improved "unambiguously" during the quarter, and that the company was "clearly taking market share, demonstrating product innovation, and benefiting from significant international exposure."

However, he also wrote: "What's cloudy is the margin expansion."

Amazon has been investing heavily in technology needed to expand new cloud computing businesses in the USs and Europe that store and process data for customers. A number of firms, including Microsoft and Google, are racing to develop similar businesses that shift data and applications from PCs to remote servers.

Last fall, Amazon introduced a US$399 electronic book called the Kindle and an online store where customers can download e-books. Bezos did not reveal sales figures of the device, but he said the company was seeing very strong demand for the Kindle.

"Demand is outpacing our expectation, which is something we're very grateful for," he said.

The company has to speed its manufacturing to meet that demand, he said.

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