Amazon profits hit by investment in Kindle

The online retail giant has disappointed the market with a 73-percent drop in profits, although it says the investment in Kindle and distribution that weighed on its results will pay off in the long term

Amazon's profits fell by 73 percent in the third quarter, as a result of heavy investment in its updated Kindle e-reader and other areas.

Jeff Bezos

Amazon's profits fell 73 percent in the third quarter as it invested in its Kindle e-readers, including the Kindle Fire (pictured, with Amazon boss Jeff Bezos). Photo credit: CNET News

The e-retail giant on Tuesday reported a profit fall from $231m (£145m) a year ago to $63m in the most recent quarter, but the decrease was not down to lower sales. Its net sales were up 44 percent year-on-year, hitting $10.88bn. Instead, profits were hit by investments that will pay off in the long term, the Seattle-based company said.

"We're investing in a lot of capacity," Amazon's chief financial officer Thomas Szkutak said in an earnings call, explaining that the company is on track to have opened 17 new fulfilment centres this year, on top of the 52 it already had.

Szkutak said Amazon was not only "investing to support retail growth", but also putting money into its "fast-growing" Amazon Web Service (AWS) cloud business and Kindle e-reader division.

Kindle sales

According to company chief executive Jeff Bezos, the Kindle had its "biggest order day ever" on 28 September, the final day of the third quarter.

In the three weeks since launch, orders for electronic ink Kindles are double the previous launch.

– Jeff Bezos, Amazon

"In the three weeks since launch, orders for electronic ink Kindles are double the previous launch," Bezos said in a statement. "And based on what we're seeing with Kindle Fire pre-orders, we're increasing capacity and building millions more than we'd already planned."

In September, Amazon introduced the Kindle Fire, an Android-based tablet priced at $199, alongside three new models of its electronic ink Kindle e-reader. The devices are set to go on sale in the US on 15 November, but no UK launch has been scheduled.

On the call, Szkutak explained that the company had sold many Kindles in the US that carry ads, revenue from which would trail behind the sales of the device itself.

"We're very, very excited about those products," he said. "We think about the economics of the Kindle business, we think about the totality. We think of the lifetime value of those devices."

Fourth-quarter warning

Although Szkutak did not talk about the cost of producing the Kindle Fire, observers have suggested Amazon could be making a loss on the unit itself, despite the future content revenues that will be opened up.

The e-retailer, which has always been a very low-margin business, warned that it may make no profit in the fourth quarter of the year, despite the fact that it expects record sales during the holiday season rush.

The market was not pleased with Amazon's results. According to the analyst house Zacks, which had expected earnings per share of $0.24 and only saw $0.14, shares were at one point down as much as 16 percent in out-of-hours trading, on top of the 4.4 percent fall that happened before the closing bell.

"Clearly, the company has been busy investing in its new Kindle Fire tablet, which is designed to contend for Apple's iPad market share, though that won't have happened until the ongoing fourth-quarter term at the earliest," Zacks said in a blog post. "In any case, this major sell-off of Amazon after hours looks to be pretty clear overreaction, and savvy investors may want to take a closer look at the stock once the dust settles."

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