Amazon's profit margin rises as new businesses grow

SAN FRANCISCO Thu Jul 26, 2012 8:25pm EDT

A box from Amazon.com is pictured on the porch of a house in Golden, Colorado July 23, 2008. REUTERS/Rick Wilking

A box from Amazon.com is pictured on the porch of a house in Golden, Colorado July 23, 2008.

Credit: Reuters/Rick Wilking

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SAN FRANCISCO (Reuters) - Amazon.com Inc reported quarterly results on Thursday that showed the growth of new businesses is boosting the profit margins of the world's largest Internet retailer.

The company's product revenue, which includes its traditional online retail business, grew 25 percent to $10.79 billion. Services revenue, which includes its online marketplace for third-party merchants and its cloud computing business Amazon Web Services, surged 57 percent to $2.04 billion.

These newer businesses are more profitable than Amazon's retail operations, so as they become a larger part of the company, overall profit margins grow.

Amazon's gross profit margin was 26.1 percent in the second quarter, up from 24.1 percent a year earlier, according to Scott Tilghman, an analyst at Caris & Co.

"There was tremendous growth in Amazon's higher-margin services," Tilghman said. "I can't find a quarter in the past nine years when Amazon's gross margin was over 26 percent."

Amazon Chief Financial Officer Tom Szkutak told analysts on a conference call that the company's third-party marketplace business accounted for 40 percent of units sold during the second-quarter, up from 36 percent earlier.

That helped improve gross profit margins, he said.

WEAK FORECAST, HEAVY SPENDING

Second-quarter net income fell sharply from last year and the company forecast a possible loss in the current quarter as it invests in warehouses and overseas expansion, and on software platforms and products.

Second-quarter international sales rose 28 percent, excluding currency fluctuations. That was down from 36 percent growth in the second quarter of 2011. International media revenue grew 12 percent, Amazon said.

Second-quarter revenue was $12.83 billion, up 29 percent from a year earlier.

The company forecast third-quarter revenue of $12.9 billion to $14.3 billion. Analysts were forecasting $14.1 billion, according to Thomson Reuters I/B/E/S.

Second-quarter net income was $7 million, or one cent per share, versus $191 million, or 41 cents a share, a year earlier, the company said.

Amazon also forecast a third-quarter operating loss of $50 million to $350 million. Excluding stock-based compensation and other items, the forecast was between a loss of $75 million and a profit of $225 million.

Analysts at JP Morgan, Raymond James and Caris & Co were looking for third-quarter operating profit of $258 million, $280 million and $388 million respectively. Those forecasts excluded stock-based compensation and other items.

"The real story here is around guidance - it was a little bit light from what people were expecting and the bottom line much lower than what people would have expected," said Needham and Co analyst Kerry Rice.

Amazon is in the midst of a massive investment phase that has hammered earnings over the past year. The company is spending heavily on overseas expansion and building out its network of storage and shipping warehouses.

It's also developing a mobile platform that includes the Kindle Fire tablet computer and possibly other mobile gadgets such as a smartphone. The company has been investing a lot in digital content to deliver over this platform, including movies, TV shows, music, apps and games. This has intensified competition with Apple, Google and even Microsoft and Facebook.

"They're going to spend to build the infrastructure and capacity to deliver the products and services that they feel the consumer wants," Rice said. "I don't know that we can say they are investing or spending too much. It's certainly more than people expected."

During a conference call with reporters on Thursday, CFO Szkutak said operating expenses are growing faster than revenue and suggested that this may continue.

"We're investing a lot because of the opportunities we see," the CFO said.

Amazon is spending a lot in the third quarter because it is preparing for the crucial holiday shopping season, he explained. Much of that investment is going into the company's new warehouses; it plans to open 18 this year, possibly more.

The company also plans to keep investing a lot in video content and technology infrastructure to support its cloud computing and online retail businesses, the CFO said.

But he quelled speculation that Amazon was planning a big rollout of same-day delivery services. Amazon does not see "a way to offer same-day delivery on a broad scale economically," he said.

Shares of the company rose 1.1 percent to $222.42 in after-hours trading from the NYSE close of $220.01, after first dipping 2.3 percent.

Those gains may have been tempered by slower international growth and the company's warning that it may lose money in the third quarter.

"I am surprised Amazon is getting as much of a free pass as they are, given international revenue weakness and third-quarter guidance," Tilghman said.

(Reporting By Alistair Barr; Editing by Phil Berlowitz)

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