UPDATE 5-Amazon shares set record after strong quarterly profit

Tue Jan 29, 2013 7:21pm EST

* Better-than-expected income, margins push shares to record
    * Higher-margin areas like e-books, cloud computing helped
drive profit
    * Third-party marketplace growth boosts margins
    * Executives tout digital content sales growth
    * Warehouses closer to shoppers help Amazon control shipping
costs-CFO

 (Adds more details from results and analyst conference call)
    By Alistair Barr
    SAN FRANCISCO, Jan 29 (Reuters) - Amazon.com Inc 
shares hit a record on Tuesday after it reported
better-than-expected quarterly profit, fueled by the growth of
higher-margin businesses during the fiercely competitive holiday
quarter.
    The world's largest Internet retailer said that its cloud
computing services, video content sales and its aggressive
expansion in e-books helped increase profitability.
    In addition, a growing network of warehouses or fulfillment
centers closer to customers held down shipping costs as it vied
with Wal-Mart Stores Inc and other major retailers for
consumer dollars over the holidays.
     Chief Executive Jeff Bezos highlighted the Kindle's e-book
business, calling it a multi-billion dollar category that grew
about 70 percent in 2012. Its traditional physical book business
rose about five percent in the same period, he noted. 
    "We're now seeing the transition we've been expecting,"
Bezos said in the company's results statement.    
    Profits have shrunk in recent years as the company invested
for longer-term growth, building massive fulfillment centers,
developing a Kindle Fire tablet hardware and digital content
business in competition with Apple Inc, and expanding
into Internet-based cloud services.
    The fourth-quarter profit results suggested that Amazon may
be able to generate attractive returns from such spending,
analysts said.
    "The fourth-quarter operating income was up more than
expected," said R.J. Hottovy, an equity analyst at Morningstar.
"This supports the bull case that Amazon can monetize its growth
over the longer term."
    The Seattle-based company said operating income jumped 56
percent to $405 million in the fourth quarter, compared with
$260 million in the fourth quarter of 2011.
    Amazon's stock climbed 9 percent to $284 in after-hours
trading and touched $288 earlier in the session. It hit a record
of $284.72 in regular trading on Jan. 25.     
 
    MARGIN FOCUS
    The company also said fourth-quarter revenue rose 22 percent
to $21.27 billion as it grabbed a big share of online spending
during the holidays. But it was the profit that initially caught
Wall Street's eye.
    "It was a much better-than-expected gross margin, a strong
forward indicator to drive margin expansion. What is really
important is gross profit dollars and that line is stronger,"
said Ken Sena at Evercore Partners.
    The gross profit margins were 24 percent in the fourth
quarter, compared with Wall Street expectations of about 22
percent. 
    "Incredibly strong margins," said Jordan Rohan, an analyst
at Stifel Nicolaus. Amazon generated the highest quarterly gross
margin in its North America business in more than three years,
he noted. 
    Amazon mainly operates as a retailer, buying physical
products at wholesale prices, storing them and then selling at a
slight mark-up to consumers online.
    But the company has expanded into other businesses that are
potentially more profitable, including cloud computing, digital
content and acting as an online marketplace for other merchants.
    These newer businesses are growing faster than the company's
original retail operations, boosting profitability.  
    
    3P GROWTH
    The improved profitability was partly driven by the growth
of Amazon's online marketplace for third-party merchants, known
as 3P. 
    This business accounted for 39 percent of total unit sales
in the fourth quarter, up from 36 percent a year earlier. Total
unit sales rose 32 percent in the holiday quarter, while 3P unit
sales climbed more than 40 percent, compared with the fourth
quarter of 2011, according to Amazon Chief Financial Officer Tom
Szkutak. 
    When Amazon sells products itself, it reports the total
value of the sale as revenue. The cost of that product is then
subtracted for a gross profit margin. When a third-party
merchant sells products on Amazon's marketplace, the company
gets a cut of that sale. That commission is reported as revenue,
and most of it falls straight to its bottom line as profit.
    "That shift means lower revenue numbers but much higher
profit margins," said Rohan. 
    
    AWS, ADS, DIGITAL GOODS
    Amazon's cloud computing business, Amazon Web Services, or
AWS, is also thought to be higher margin than the company's
original retail business.
    Amazon also runs an online advertising business that is also
considered a lot more profitable. 
    These businesses are in the company's North America Other
category, which generated fourth-quarter revenue of $769
million, up 68 percent from a year earlier. 
    "AWS is growing very fast and that is certainly impacting
our operating profit," said CFO Szkutak.
    The financial chief also highlighted Amazon's newer digital
content businesses, particularly its video streaming offering. 
    Amazon has invested heavily in TV shows and movies to stream
over the Internet. It has partly packaged this as a free service
to consumers who have subscribed to its Prime two-day shipping
service. But customers can also pay to stream other video, often
newer movies. 
    "The percentage of Prime customers who were watching free
content through Prime instant video has gone up dramatically
year-over-year," Szkutak said during a conference call with
analysts. "We've also increased Prime membership dramatically
year-over-year. They are also purchasing paid content."
    
    SHIPPING COSTS FALL
    One of Amazon's biggest investments in recent years has been
focused on building lots of fulfillment centers closer to
shoppers. 
    It costs a lot to set up these giant warehouses, but over
the long term, Amazon hopes they will help the company reduce
its shipping costs. 
    That strategy shows signs of success in the fourth quarter.
Net shipping costs were 4.5 percent of sales in the period, down
from 5.4 percent a year early, the company reported. 
    "Over the past few years, we have expanded our fulfillment
network to the point where we are closer to customers and you're
seeing that reflected in our transportation costs," Szkutak CFO
said.   

 (Reporting By Alistair Barr and Alexei Oreskovic in San
Francisco; Editing by Bernard Orr)
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.