Amazon profit drops 96%

July 26, 2012: 5:48 PM ET

Profits sank even as sales jumped as Amazon continues to invest in its long-term future.

FORTUNE -- Despite a healthy bump in sales across multiple businesses, Amazon's profits took a hit in the second quarter.

The company reported a 29% sales increase to $12.83 billion, up from $9.9 billion the same time last year. That was off from Wall Street's estimates, which had predicted revenues of $12.9 billion. Profits dropped 96% to $7 million, or 1 cent per share, compared with $191 million a year ago. Amazon shares were up 1% in after hours trading.

The drop in profits wasn't much of a surprise. Although Amazon (AMZN) saw record sales in 2011, its profits over the last few quarters have been significantly weighed down by the company's ambitious spending. CEO Jeff Bezos has publicly said in the past that the company is spending heavily now on expansion in multiple businesses to achieve long-term gains.

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One business Amazon has been investing heavily in the Kindle. Last fall saw the high-profile release of the Kindle Fire tablet, a device many analysts believe Amazon initially sold at a loss. The company has also incurred expenses related to building more distribution centers. So far this year, the company has opened eight new warehouses, with plans of opening another 10 this year.

Amazon also "may be facing further margin pressure due to the success of its Amazon Prime offering," wrote Benchmark Capital analyst Daniel Kurnos in a research note. In an earnings release, Bezos made special note of Amazon Prime, the $79-a-year loyalty reward program that has grown beyond offering two-day on products to include e-book borrowing and streaming access to some TV shows and movies. Currently, the company offers 18,000 movies and TV episodes, and 170,000 lendable books. "What hasn't changed since we launched Prime? The price," said Bezos. "It's still $79."

Amazon Chief Financial Officer Tom Szkutak said the company's operating expenses included adding capacity to Amazon Web Services and overall retail, the latter of which may include heavy investments in the expansion of same-day delivery of products, as originally reported by The Financial Times. ("We don't see a way to see do that [same day nationally] on a broad scale economically," Szkutak admitted.)

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The company was somewhat cautious looking ahead to the third quarter, outlining revenues between $12.9 billion and $14.3 billion versus estimates from the Street of $14.1 billion.

"The guidance for the third quarter was a bit disappointing on the margin line, indicating that Amazon continues to spend at a fast pace to drive growth," Victor Anthony, a senior analyst with Topeka Capital markets, told Fortune. "Our thesis remains the same, however. We see an inflection point in margins in 2013 and we continue to see a transformation model led by share gains in e-commerce, Kindle devices driving sales of high margin digital media content, and Amazon Web Services continuing into a meaningful cloud services business."

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JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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