Amazon to Curtail Its Spending
Going into the critical holiday shopping season, Amazon.com said yesterday that it would slow its investment in new technology in a bid to start reaping the rewards of its continuing growth.
Amazon, the huge online retailer based in Seattle, reported that its third-quarter earnings fell by more than a third, dragged down by heavy spending to get new projects off the ground, even as its sales rose 24 percent.
Despite the profit hit, the company’s promise to ease up on future spending on new technology came as a relief to investors, who bid up Amazon’s shares by more than 14 percent, to $38.38, in the after-hours trading that followed the release of its results.
Amazon shares had risen 75 cents, to close at $33.65, during the regular session.
Executives have long insisted that lower prices, new services and expanded selection are essential to power growth in sales and are necessary in light of the highly competitive market. Amazon faces challenges not only from merchants selling physical goods like electronics and toys, but also from sellers of digital products, including the Apple Computer iTunes store for music.
But for the first time in a long while, executives moved to assure investors that expansion and new hiring would now begin to slow.
“We expect our year-over-year increase in technology spending to decline during the fourth quarter,” Tom Szkutak, Amazon’s chief finance officer, said in a conference call with analysts.
Lately, Amazon’s profit gains have slowed as it has invested heavily in teams of software engineers and computer scientists to build the technology for its new offerings.
During the third quarter, Amazon’s investment in new technology and content increased 42 percent, to $171 million. Among the new initiatives was Amazon Unbox, a video downloading service introduced in September.
Sales increased to $2.31 billion in the third quarter, compared with $1.86 billion in the period last year, slightly higher than the $2.25 billion expected by analysts.
Profit in the quarter declined 37 percent, to $19 million, or 5 cents a share, from $30 million, or 7 cents, a year earlier. That beat analysts’ forecasts of 3 cents a share, according to Thomson Financial.
Jeffrey Bezos, the chief executive, said Amazon increased the selection of products it sells directly through its sites by roughly 50 percent during the quarter.
Investors were also encouraged yesterday by Amazon’s forecast for the holiday quarter. Amazon now expects revenue of $3.63 billion to $3.95 billion during the fourth quarter, an increase of 22 percent to 33 percent over the period last year, topping Wall Street’s forecast of $3.69 billion.
For the full year, revenue is expected to be $10.35 billion to $10.68 billion, growing 22 percent to 26 percent compared with 2005.
“There’s nothing remarkable about their performance, but investors are basically saying that things look O.K.,” Safa Rashtchy, an analyst with Piper Jaffray, said. “The sector has rebounded. There is good growth momentum.”
One major area of investment for Amazon has been in the toy business, after its courtroom defeat this year by Toys ‘R’ Us, in a ruling that allowed the toy retailer to sell items on its own Web site. After losing that high-margin relationship, Amazon spent heavily to enhance its selection and its business partnerships with toy companies and other retailers.
Company executives also continued to defend Amazon Prime, the discount shipping program, despite longstanding concern among some analysts that the program was too costly. Amazon Prime gives subscribers unlimited two-day shipping for a fee of $79 a year.
“We continue to see increased purchases by Amazon Prime members across more categories,” Mr. Szkutak said.
Indeed, Amazon’s popularity appears to be growing. According to Nielsen/NetRatings, a market research company, traffic on Amazon.com’s sites overall increased 14 percent during the fourth quarter over last year. And the number of purchases increased to 5.8 million in August from 4.7 million in July.
Amazon’s earnings report was released the day after I.B.M. filed two lawsuits against the company, contending it has built its business on technology developed by I.B.M.