Amazon's third quarter fails to impress

Amazon reported strong third quarter earnings and upped its outlook for the fourth quarter, but it's unclear whether that's good enough to keep the e-tailer in that elite club that has been carrying the Nasdaq.

On Tuesday, Amazon reported third quarter net income of $80 million, or 19 cents a share, up from $19 million, or 5 cents a share, a year ago. Revenue for the quarter ended Sept. 30 was up 41 percent from a year ago to $3.26 billion.

The problem: Wall Street was expecting earnings of 18 cents a share in the third quarter and sales of $3.14 billion. Simply put, that's just not enough upside if you're going to hang out with the likes of Research in Motion, Apple and Google (also known as Nasdaq's anointed ones).

The end result: That giant sucking sound you hear afterhours are Amazon shares. Shares were down to about $91 from a close of $100.82. All that said, Amazon's quarter was strong for the e-tailer (although I'm still stunned that the company only pockets $80 million in profits in a quarter on $3.26 billion in revenue). Amazon's operating margins were 3.8 percent worldwide in the third quarter, down from 4 percent in the second quarter and 4.8 percent in the first.

As for the outlook, Amazon (all BTL posts) projected sales of $5.1 billion to $5.45 billion in the fourth quarter and operating income of $221 million and $291 million. The revenue outlook is stronger than Wall Street expectations calling for fourth quarter sales of $5.15 billion.

For 2007, Amazon projected sales between $14.26 billion to $14.61 billion. That range is better than Wall Street projections of $14.18 billion in sales. Amazon projected 2007 operating income of $605 million and $675 million.

By the numbers:

• Operating cash flow was $1 billion for the trailing 12 months. Free cash flow was $800 million for the same period.
• North American sales were $1.79 billion, up 42 percent from a year ago. International sales were $1.47 billion, up 40 percent from a year ago.
• Media sales (books, DVDs and music) was $2.09 billion, up 36 percent from a year ago. A lot of that was the latest Harry Potter book. Electronics and other merchandise was up 56 percent in the third quarter to $1.08 billion.
• Amazon Web Services has 290,000 developers registered, up from 25,000 in the previous quarter. Amazon's S3 service has more than 10 billion objects stored.
• Amazon ended the quarter with 15,800 employees, up from 14,400 in the previous quarter.