updated 10/25/2005 9:24:56 PM ET 2005-10-26T01:24:56

Internet retailer Amazon.com Inc. said Tuesday that its third-quarter profits fell 44 percent, in large part because of the settlement of a patent-infringement lawsuit. The company also offered a tepid outlook for sales in the coming holiday season and its shares sagged more than 7 percent in late-session trading.

For the quarter ending Dec. 31, Amazon is projecting sales of $2.86 billion to $3.16 billion — 13 percent to 24 percent above revenue in the final quarter of 2004, but below the smallest estimate of $2.91 billion among 13 analysts surveyed by Thomson Financial. The mean estimate, $3.01 billion in sales, also falls under the mean Wall Street forecast of $3.08 billion.

In a report released after the markets closed, the Seattle-based company said its net income was $30 million, or 7 cents a share, for the three months ended Sept. 30, down from $54 million, or 13 cents a share, a year earlier.

The income slump came despite a rise in revenue. The company said net sales increased to $1.86 billion in the third quarter, up 27 percent from $1.46 billion last year.

Excluding an unanticipated one-time $40 million legal charge, Amazon said its net income would have been $50 million, or 12 cents per share. Analysts polled by Thomson had expected 10 cents per share on revenue of $1.84 billion.

In August, Amazon announced it would pay $40 million to Soverain Software LLC to settle a patent-infringement lawsuit. Chicago-based Soverain had alleged that Amazon’s Web site infringed several Soverain patents on network sales systems and Internet server access control and monitoring systems.

Amazon shares fell 7.5 percent, or $3.46, to $42.71 in the extended session. The stock slipped 76 cents, or 1.6 percent, during the regular session to close at $46.17 Tuesday on the Nasdaq Stock Market, near its 52-week high of $46.97.

Sales in the United States and Canada jumped to $1.04 billion, up 28 percent from $816 million in the same period last year. International sales rose to $817 million, up 26 percent from third quarter 2004 sales of $647 million.

Electronics and general merchandise sales were brisk, growing 43 percent worldwide to $491 million, up from $344 million last year.

Books, music and other products in the media category still make up the bulk of the company’s revenue. Media sales rose 20 percent to $1.31 billion, up from $1.09 billion last year.

Amazon said it sold more than 1.6 million copies of the latest Harry Potter edition, making it the company’s biggest new product release.

For the full year, Amazon is predicting sales of $8.37 billion to $8.67 billion.

The company did not offer any guidance for fiscal 2006, but said it plans to spend more money hiring software engineers and on other technology development costs.

“This is something that keeps increasing,” Piper Jaffray analyst Safa Rashtchy said, noting that the company’s technology and content expenses are approaching 6 percent of total revenue — nearly three times what it spent a few years ago.

Additionally, Amazon’s operating margin for the most recent quarter was 6.9 percent, down from 7.4 percent in third quarter 2004. Rashtchy also said rising oil prices and decreasing consumer confidence could spur investor worries that holiday sales will be weaker than the company had previously predicted.

“The stock had gone up fairly well over the past few weeks or so, in anticipation of continued improvements in margins and stronger guidance for Q4,” he said.

In a conference call with analysts, Jeff Bezos, Amazon’s founder and CEO, and Tom Szkutak, chief financial officer, said the company believes its growing investment in technology will ultimately improve shareholder returns — even though it will likely take time for it to pay off.

Bezos and Szkutak said they remain pleased with Amazon Prime, a $79-a-year service that gives people unlimited two-day shipping. “Customers like it. The prime members that are subscribers are buying more, they’re doing more cross-shopping,” Szkutak said, especially in electronics, tools, kitchen supplies and health and personal care products.

The company did not disclose how many customers have signed up for it or how much money Amazon Prime has brought in since it debuted in February. In general, though, it has characterized Amazon Prime, like free shipping for orders of more than $25, as an expensive service in the short term, but an investment that will reap sizable rewards in new business over time.

Amazon.com started out as a virtual book store 10 years ago, and is now the world’s largest online retailer, selling everything from brake repair tools to belly rings.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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