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Amazon Profits Up, Stock Down

Amazon reported results for its fourth quarter and year ended December 31, 2004 on Wednesday.

Amazon's pro forma earnings of $0.35 a share were a nickel shy of analysts' estimates. Investors kicked the stock down about 15 percent in after hours trading.

Annual growth was fueled by $1.69 billion in sales in the Electronics & Other General Merchandise category. The category accounted for 24 percent of worldwide net sales in Q4. Even though book sales set a record over the Thanksgiving holiday, sales of electronics exceeded books in that period for the first time, executives said.

Still, Harry Potter has been a cash cow for Amazon as well as for author J.R. Rowlings. Customers already have placed hundreds of thousands of pre-orders for the sixth installment on Amazon, which is not scheduled to be released until July 16.

To help encourage multiple purchases, the company also introduced "Amazon Prime," a $79 per year membership program offering unlimited express two-day shipping or one-day, overnight shipping for an additional fee of $3.99 per item. Amazon CEO Jeff Bezos told analysts on a conference call that shipping had gone from a profit center to a loss leader as the company lowered the threshold for free shipping.

"[Amazon Prime] is about earning more of the business from current customers," Bezos said. He expects the impact to be on frequency of sales and increased conversion rates among existing customers, rather than on attraction of new customers.

By the Numbers

For the quarter, Amazon's net income was $347 million, or $0.82 per diluted share, compared with net income of $73 million, or $0.17 per diluted share, in fourth quarter 2003. Ignoring the bad stuff on the balance sheet results in pro forma net income for Q4 of $394 million, or $0.93 per diluted share, up from $125 million, or $0.29 per diluted share the previous year.

Operating income was $162 million, compared $138 million in Q4 2003. Net sales of $2.54 billion increased 31 percent over the $1.95 billion the online retailer raked in during the same quarter of 2003; the company benefited from changes in foreign exchange rates.

For the year, net income was $588 million, or $1.39 per diluted share, compared with net income of $35 million, or $0.08 per diluted share, in 2003. Pro forma net income for 2004 was $639 million, or $1.50 per diluted share, compared with $256 million, or $0.61 per diluted share, in 2003. Amazon benefited from $244 million in deferred taxes. Excluding that, pro forma net income would have been $395 million, or $0.93 per diluted share. Operating cash flow was $567 million for 2004, compared with $392 million for 2003.

Net sales were $6.92 billion, up 31 percent from $5.26 billion in 2003. Net sales, excluding a $276 benefit from foreign exchange rates, grew 26 percent year over year. Operating income was $440 million in 2004, compared with $271 million in 2003. Excluding the $20 million benefit from foreign exchange rates, consolidated segment operating income grew 30 percent year over year.

Quarterly North American sales grew 22 percent year over year, while international sales were up 43 percent from Q4 2003.

The company gave guidance for the first quarter of 2005: net sales growth between 18 and 27 percent, or between $1.80 and $1.95 billion on net sales of between $8.05 and $8.06 billion. Operating income is expected to decline to between $80 and $110 million.

Bezos denied that margins were deteriorating. He chalked up the expected decline in operating income to investments in talent. The company plans to hire computer scientists and engineers, while using accounting standard SFAS No. 123R requiring the expensing of stock options. The rule doesn't go into effect until July 1, 2005. Amazon was an early adopter.

"We see this as investment periods not being constant or smooth," Bezos said. "This is an important time to be investing."