February 2, 2007, 12:00 AM

Amazon keeps its sales machine in high gear

Amazon.com keeps churning out the sales, with 2006 revenue rising by 26%. But 2006 net income declined by 47% as the world’s largest retailer continues to spend heavily on new content and technology.

There isn’t a doubt that Amazon.com, the largest online retailer, keeps churning out the sales.

In the fourth quarter, Amazon grew its web sales to $3.99 billion, an increase of 34% over Q4 2005 sales of $2.98 billion, while 2006 sales hit $10.71 billion, up 26% from revenue of $8.49 billion in 2005.

But as Amazon keeps on growing and adding lines of merchandise, including groceries and shoes, the company’s net income continues to fall.

In Amazon’s just released year-end financials, Q4 net income fell 51% to $98 million from $199 million in Q4 2005. For the full year, Amazon’s net income dropped 47% to $190 million in 2006, compared with $359 million in 2005. Operating income also declined by 10% to $389 million vs. $432 million in the prior year.

Amazon says the decline in net income is offset by increased spending on new technology and content. In 2006, Amazon spent 6% of total sales-$642 million-on new content and technology, compared with 5.3% of sales, or $450 million, in 2005.

“We are confident that if we continue to improve the customer experience and execute efficiently, our value proposition as well as our free cash flow will expand,” Amazon chief financial officer Tom Szkutak told Wall Street analysts in the company’s year-end earnings call.

In Q4, Amazon’s North American sales, which include Canada and the U.S., totaled $2.21 billion, an increase of 31.5% of 2005 North American sales of $1.68 billion. International sales in the quarter rose year over year to $1.78 billion compared with $1.29 billion in 2005, an increase of 38%. “We had a record holiday season with accelerating revenue growth and significant sequential improvement in operating leverage,” says Amazon founder and CEO Jeff Bezos.

For 2007, Amazon, No. 1 in the Internet Retailer Top 500 Guide to Retail Web Sites, expects revenue of $13 billion and $13.7 billion. To attract more repeat buyers, Amazon will also continue to emphasize Amazon prime, its $79 annual membership program that includes unlimited two day shipping. “In terms of Prime customers, what we`re seeing right now is adoption is very strong,” Bezos told Wall St. analysts. “Prime customers are certainly buying more from us, so we`re getting a bigger share of wallet from those particular customers. They`re also doing more cross-shopping.”

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