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1/29/2013
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Amazon Profits Fall Despite Rising Revenue

Amazon reports fourth-quarter sales of $21.27 billion, but heavy capital expenditures led to a decline in net income in quarter and an overall $39 million loss for 2012.

Amazon.com grew revenue at a highly respectable 22% rate in its fourth quarter of 2012, but profits dipped significantly. It's the same unusual combination that produced investor impatience with Amazon.com in its third quarter, when it reported its first loss, of $28 million.

It's also the combination that produced a 40% run-up in the value of Amazon.com stock in 2012. CEO Jeff Bezos has said his firm is investing for the long term, and for the short term, that appears to mean reduced profits.

For 2012 as a whole, Amazon reported a loss of $39 million, compared to net income of $631 million in 2011. For the fourth quarter, net income was down 45% to $97 million from $177 million the year before.

If anyone doubted Amazon is maneuvering to expand its online retailing franchise as fast as possible, the combination of the fourth-quarter's depressed profits with the previous quarter's loss is proof. One obvious culprit is the rapid expansion of fulfillment centers. Twenty were added in 2012, allowing Amazon to take orders and then cut a day or days off the time it takes to get products to customers. It also introduced a host of new products and services, including high-end Kindle Paperwhite e-readers sold at competitive prices.

[ Wondering how's Amazon Web Services unit is doing? See Amazon's Cloud Revenues, Examined. ]

The priority on business expansion seems obvious enough. But Amazon.com CFO Tom Szkutak was tight-lipped about any immediate turnaround plans, and Bezos did not participate in the fourth-quarter earnings call Tuesday. If anything, Szkutak suggested more of the same was probably in the offing. "We will continue to go into locations that we like to be in. We will continue to expand our footprint over time and be closer and closer to customers." No target number for new fulfillment centers was mentioned, but it's clear that capital expenditure phase isn't over.

"Stay tuned," he said. We'll let you know as the year progresses."

Amazon was required to start collecting sales taxes that ranged from 7.25% to 9.75% on sales in California in mid-September. As the highly wired, most populous state, those collections may also have had an impact on profitability in the fourth quarter. New York and Illinois have passed their own e-commerce sales tax measures, and more states are likely to follow their lead.

For the year, net sales increased to $61.09 billion, compared to $48.08 billion in 2011. Operating income decreased 22% to $676 million, compared to $862 million the year before. Net loss was $39 million, or $0.09 per share, compared to net income of $631 million, or $1.37 per share in 2011.

The fourth quarter alone produced sales of $21.27 billion, up 22%. Operating income increased 56% to $405 million, but net income decreased 45% to $97 million, compared to $177 million in the fourth quarter the year before.

In his guidance for the coming first quarter of 2013, Szkutak said revenue of $15 to $16.6 million is expected, and an operating loss as large as $265 million or a net income of $65 million may occur.

Szkutak was questioned by analysts in the earnings call about the "attach rate" or follow-on sales from Kindle, Kindle Fire HD and Kindle Paperwhite tablet sales. The e-reader is viewed as a loss leader or break-even sale for Amazon, and analysts wanted to know whether it was generating follow-on sales that might be viewed as contributing to profits.

"We haven't given out a whole lot of detail on attach rates," said Szkutak, and he continued to hold that line. "Kindle is seeing good progress ... I can't give you specific numbers." The earnings announcement said the Kindle Fire HD, which comes in $199 and $299 versions, was the most frequently purchased electronics item on the Amazon.com site.

Amazon had 23 million digital media items, including movies, TV shows, songs, magazines, books, audiobooks, games and apps available on its site at the end of 2012, compared to 19 million at the end of 2011. The tablet sales are viewed inside Amazon as helping generate a wider market for its digital content.

Amazon's Prime Instant Video is now stocked with 36,000 titles, including popular television series The Closer, Falling Skies, Dance Moms, Storage Wars and Pawn Stars, after recent deals with Warner Bros., Turner Broadcasting, Domestic Television Distribution and A&E Networks.

Szkutak said Amazon was investing in additional geographic locations. "China is one of them," he said. It's also launched Kindle stores for Brazil, China and Japan stocked with thousands of local-language books.

Amazon Web Services revenues remained buried in a supplemental income that Szkutak said included some marketing revenues. The non-AWS revenues in the category are believed to be derived from co-sponsored credit card sales and media sales unrelated to the cloud service.

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