Amazon Schools Bears Anew

Amazon saw brisk sales in most of its key product categories. Sales of media goods such as books and music grew 20% to $1.25 billion, while electronics grew 40% to $456 million and sales of other goods increased 103% to $51 million.

Free cash flow, a financial measure favored by Amazon itself, came in at $486 million for the trailing 12 months, up 17% from $417 million at the end of the previous quarter.

Amazon's spending on fulfillment and customer service was 8.7% of revenue, down from the 8.8% it spent in the second quarter of last year. General and administrative costs declined to 1.8% of sales from 2%. Marketing costs held at 2.3% of revenue. Amazon considers the cost of free shipping to be a marketing cost, so spending on Amazon Prime seems to have been offset primarily by a reduction in payroll costs.

The only substantial increase in spending came in technology -- especially hiring software engineers to improve search, Web services and seller platforms. Amazon spent $106 million on technology and content, or 6% of sales; it had spent 5.1% of sales in the year-ago quarter.

Bezos suggested that the investments in technology and content would help spur growth in free cash flow in coming years. "A lot of what you seen in the technology and content line is going to make things better for our sellers and for people buying from them," he said.

For the third quarter, Amazon said it expected sales of $1.76 billion to $1.91 billion, or a growth rate between 20% and 31%. Analysts had been expecting sales of $1.81 billion.

The company expects operating income to come in between $60 million and $90 million, a range between a decline of 26% and a rise of 11%.

For all of 2005, Amazon slightly raised its guidance on operating profit but kept revenue guidance little changed. The company expects sales to be between $8.28 billion and $8.68 billion (up from previous guidance of sales between $8.18 billion and $8.68 billion) and operating income between $415 million and $515 million (compared with the previous range of $395 million to $510 million).