Amazon Suffers Big Drop in Income

Investors shrugged off Amazon’s warnings this summer that its third quarter would be weak.

Whoops.

Moments after the retailer reported Tuesday that operating income for the[You must be registered and logged in to see this link.] quarter had fallen 71 percent from 2010, the high-flying stock sank $25 in after-hours trading. Add the $10 that Amazon had lost before the earnings report, and its market cap shriveled in one day by about $16 billion.

If the past was weak, Amazon was cautious about the future, too. Despite the new Kindle Fire tablet’s selling so well that it was already increasing production, Amazon said it might lose as much as $200 million in the fourth quarter.

“There are times when investors shoot first and ask questions later,” said Scott [You must be registered and logged in to see this link.]Devitt, an analyst with Morgan Stanley. He remains a believer. “Does the company still have a strong ability to grow? I think the answer is yes.”

Revenue for the third quarter, which ended Sept. 30, came in largely on target. As customers swarmed to boxes of dried cherries, “Pirates of the Caribbean,” downloads of the Sims video games, diagnostic code readers for cars and the latest “Diary of a Wimpy Kid” — all Amazon best sellers in their categories — sales rose 44 percent to $10.88 billion.

Amazon has been stressing recently, as it has so often over its 16-year history,[You must be registered and logged in to see this link.] that it is investing for the future, not seeking immediate profit. With revenue rising about 40 percent each quarter, it simply needs more capacity. In a highly competitive and fragile retailing environment, that is an enviable problem to have.

This year, Amazon is adding 17 warehouses to the 52 it already has. It is rapidly expanding its data centers as it develops its Web storage business. And every $199 Fire Amazon sells will be at a loss — another drag on income.

The profit will come later, the company hopes, as Fire owners buy videos, music and e-books. When Amazon executives “think about the economics of the Kindle business, we think about the totality,” Tom Szkutak, the chief financial officer, said in a conference call with analysts.

Three months ago, the company said third-quarter operating income [You must be registered and logged in to see this link.]would be down as much as 93 percent. That worst-case situation did not come to pass.

But Wall Street, which pushed the stock to a new high this month, was overly optimistic. Thirty-one analysts estimated an average revenue of $10.93 billion for the quarter, with earnings per share of 24 cents, according to Yahoo Finance. The actual results were 14 cents a share. In the third quarter of 2010, Amazon earned 51 cents a share.

The fourth quarter will be the subject of intense interest as analysts try to gauge how the Fire is selling. It generally got rave reviews in its late September introduction as the first viable competitor to Apple’s iPad.

Amazon’s chief executive, Jeffrey A. Bezos, said as part of the earnings [You must be registered and logged in to see this link.] release that, “based on what we’re seeing with Kindle Fire preorders, we’re increasing capacity and building millions more than we’d already planned.”

Anthony DiClemente of Barclays Capital is estimating that Amazon will sell 21 million Kindle devices next year, including the stripped down e-reader, the Fire and a new tablet with a bigger screen. Kindle sales have been a guessing game ever since their introduction four years ago. Amazon declines to release numbers.

Amazon’s torrid growth more than 15 years after its founding makes it an object of envy and fear across the retail world. Viewed from a public relations point of view, however, it has been having a difficult time recently.

First came the lengthy fight with the state of California over whether Amazon would collect sales tax. Even more damaging was a long article in The Morning Call of Allentown, Pa. It revealed that workers in Amazon’s local warehouse were collapsing from heat stress as they struggled to ship books and CDs so quickly that the customers would never even consider going to a land-based store.

It was a striking snapshot of the underbelly of the Internet economy: Amazon arranged with the local ambulance service to have vehicles stationed outside the warehouse on peak heat days. As workers fell down on the job, they were whisked away to the hospital, the newspaper said.

Cetronia Ambulance Corps confirmed The Call’s reporting and then stopped talking. Amazon declined to answer questions but has not succeeded in putting the matter behind it. This week, Amazon posted a note on its site revealing that there were “multiple” temperature problems at the warehouse — “low temperature events” as well as “high temperature events.”

The note was not completely clear, but it seems that workers in wintertime left the building during fire alarms and then were not immediately let back in.

The retailer said it had “a new set of procedures” for the winter and had installed air-conditioning for the summer. “It’s safer to work in the Amazon fulfillment network than in a department store,” it said, citing government survey data on nonfatal occupational injuries and illnesses.

Amazon’s relentlessness has made it a very successful company. But some in the tech world are beginning to wonder if there is a point at which you can become too driven, even if it is supposedly in the service of your customers. As Danny Sullivan of Search Engine Land wrote in an open letter to Mr. Bezos at the height of the tax controversy: “Don’t make me hate you.”
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Paul Saffo, an expert on Silicon Valley culture, says that traditional companies are owned by their shareholders but digital companies are in effect owned by their customers. Apple is the most celebrated example of this passion, but Amazon also evokes strong feelings. People shop there because they like what it stands for, or what they think it stands for.

“Amazon is not just a place you buy stuff,” Mr. Saffo said. “You have an emotional attachment to it. So if Amazon thinks things like collecting taxes and how it treats its warehouse workers are not an issue for their customers, they’re in for a surprise.”