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Amazon profit falls by almost half, but sales rise 22 percent

Shares of the online retailer jump after hours as it rings up improvements in profit margin. CEO Jeff Bezos says that e-books are now a multi-billion-dollar category for Amazon.

Amazon CEO Jeff Bezos
Amazon CEO Jeff Bezos
David McNew/Getty Images

Amazon's golden touch continues.

Despite missing analysts' earnings estimates for the fourth quarter -- by a country mile, actually -- Amazon's stock traded up significantly in after-hours trading. Amazon's net income fell 45 percent to $97 million, or 21 cents per diluted share, compared with $177 million, or 38 cents a share, for the same period a year ago.

In the quarter, which ended December 31, Amazon continued its double-digit sales growth with sales up 22 percent to $21.27 billion.

That fell short of the average earnings estimate of 29 cents-per-share. How to explain the initial burst of investor enthusiasm? A few possible explanations.

Over the years, some on Wall Street have expressed reservations about Amazon's high investment each quarter, worrying about the impact on margins. But although operating expenses climbed 22 percent in the quarter, Amazon's cost of sales as a percent of revenue actually dipped to 75.8 percent from 79.3 percent a year earlier.

Operating margins also rose to 1.9 percent from 1.3 percent, another sign of improvement.


Investors may also have been reacting to Amazon's guidance for the first quarter. The company expects a healthy rise in sales, to between $15 billion and $16.6 billion -- between 14 percent and 26 percent above its revenue in the first quarter of 2012. Amazon also projected a wide range of operating income, which it expects to come in between a $285 million loss and a $65 million profit. A year ago, Amazon notched $192 million in operating profit.

Amazon has scheduled a conference call with analysts to discuss the earnings this afternoon.

Although Amazon missed estimates, it remains to be seen whether Wall Street will whack the company. In the third quarter, Amazon lost 60 cents a share, missing analysts' estimates. But the company didn't get sent to the dog house as sales continued to soar, rising 26.9 percent to $13.81 billion in the period. On the day it reported its third quarter results, Amazon's stock traded at $222.92. It closed today at $260.

"We're now seeing the transition we've been expecting," CEO Jeff Bezos said in a statement. "After 5 years, eBooks is a multi-billion dollar category for us and growing fast -- up approximately 70% last year. In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just 5%. We're excited and very grateful to our customers for their response to Kindle and our ever expanding ecosystem and selection."

Scott Tilghman, a senior analyst with B. Riley Caris, said it looks like the results were helped by a shift towards an agency model on e-books, where Amazon is allowed to sell books near wholesale prices -- the result of some publishers settled government antitrust allegations last September.

"Drilling down into the numbers it looks like there was a significant shift towards agency model sales on e-book sales or third-party mix, which enabled considerably higher operating margins," he said. That would mean the revenue would take a hit, but profit would not, which is why investors are pleased.

"What Amazon as tried to do is find the balance -- whether they sell a good or someone else's -- that the net profit to them is the same," he said. "That's part of the reason we saw such a jump in gross margins."

The fourth quarter by the numbers:

  • Net sales: $21.26 billion
  • Net income: $97 million
  • North America sales: $12.2 billion
  • International: $9.1 billion
  • Earnings per share: 21 cents

Paul Sloan contributed to this report. .