Updated from 9:27 a.m. EDT

Amazon

(AMZN) - Get Report

met analysts' first-quarter earnings and revenue estimates, but the stock tumbled in after-hours trading Tuesday and again early Wednesday after the company revealed a $56 million tax expense. Guidance for the next quarter was uninspiring.

The company said it earned 18 cents a share in the first quarter ended March 31, including the tax expense of $56 million, in line with the consensus forecast. Amazon posted a profit of 26 cents a share in the year-ago period. Revenue rose 24% to $1.9 billion from $1.53 billion a year ago, also in line with analyst estimates. Excluding a $30 million benefit from foreign-exchange rates, revenue gained 22% over last year.

Despite meeting the Street's numbers, Amazon's stock declined on concern about its shrinking profit margins. In early trading Wednesday, Amazon's stock was recently down 6.2% to $30.68. That was after a 2.5% decline in Tuesday's trading session. In analyst action, Piper Jaffray reiterated an underperform rating on the stock, which appears headed for a new 52-week low Wednesday.

Amazon's efforts to improve the experience of customers on its site continued to make for an unpleasant ordeal for investors in the company. New initiatives to spur more frequent purchases through Amazon Prime, which offers for free nearly unlimited two-day shipment for a $79 annual fee, and an expansion of its technology staff continued to push margins down, as investors feared they would.

CEO Jeff Bezos indicated Amazon Prime was catching on, which would accelerate the short-term trend of rising revenue and declining profit. "We're seeing especially heavy use of Amazon Prime in electronics, tools, kitchen and health and personal care," he said.

But as many investors feared, operating margins continue to erode. While Amazon's gross profit margin gained to 24.1% in the quarter from 23.6% a year before, operating margins fell to 5.7% from 7.2%.

The falling operating margins came as Amazon's operating costs increased across the board. The biggest increases came in the $92 million in technology and content costs and $42 million in G&A costs, both up 67% on the year. Fulfillment costs rose 30% to $166 million and marketing costs rose 34% to $45 million.

Amazon's free cash flow, the financial metric that Bezos has been urging Wall Street to consider over others, grew 21% to $417 million over the previous year. That growth rate is significantly below the 38% annual pace that Amazon saw for free cash flow in its December quarter.

That drop-off in free cash flow rates drew the very first question in Amazon's conference call with analysts. Bezos cited higher inventories to seize "buying opportunities" in the first quarter and to expand into new categories. He also pointed to an increase in capital expenditures to $26 million from $9 million a year before, with about half of the money going into new software.

Amazon's revenue breakdown showed two surprises, each offsetting the other: North American revenue grew 21% in the first quarter, up from 20% in the first quarter of 2004. Bezos explained that the growth came from customers signing up for Amazon-branded credit cards and new companies signing up for its Merchants.com service, in which Amazon takes on the e-commerce operations of major retailers like

Marks & Spencer

and

bebe

(BEBE)

.

The other surprise came from international sales, which grew by only 28%, a sharp decline from the 80% growth rate a year ago. In Amazon's call, Bezos declined to explain the slowdown in international growth despite repeated questions from analysts. "We're very pleased with our international sales," he said more than once in the call.

The slowdown is also evident on the operating profit level, where operating income growth from international operations slowed to 51% in the first quarter -- respectable but well below the 163% rate a year ago. North American operating profits actually declined 13%, despite the faster sales growth.

Amazon executives greeted many analyst questions with more expressions of its pleasure. Queries about the success of Amazon's DVD rental business in the U.K., which the company could expand into the U.S., and more details on adoption of Amazon Prime were essentially brushed off, with Bezos responding with bland assurances of his pleasure, but no details.

Beyond the costs of Amazon's planning for the future, the company is expecting to take a hit at the net level because of taxes. The company said in February that it expects to pay $25 million in taxes this year, up from the $4 million it paid last year.

Amazon said the rising revenue, declining profit trend would continue. For the second quarter, Amazon said it expected sales of $1.68 billion to $1.83 billion, or a growth rate between 21% and 32%. Analysts were expecting sales of $1.71 billion, on average. The company expects operating income to come in between $50 million and $80 million, a range representing a decline of 7% to 42%.

For all of 2005, Amazon slightly raised its guidance on revenue but kept its operating income guidance little changed. The company expects sales to be between $8.18 billion and $8.68 billion (up from previous guidance of sales between $8.05 billion and $8.65 billion) and operating income between $395 million and $510 million (compared with between $385 million and $510 million).