Amazon's revenue increases even as spending rises

Published Thu, Apr 24 2014 4:33 PM EDTUpdated Fri, Apr 25 2014 6:21 AM EDT

Reuters

Amazon.com revenue grew more than expected for the first quarter, largely offset by a sharp increase in spending on technology, content and new warehouses as the e-commerce company branches into new businesses.

Amazon's international unit, which accounts for 40 percent of sales, continued to be a drag as sales growth slowed to 18 percent during the quarter. Global unit sales, a closely watched measure of how many items Amazon has sold, also decelerated, rising only 23 percent.

The company is investing heavily in new markets abroad, particularly China, where it faces tough competition with Chinese e-commerce company Alibaba.

"A lot of the things that we've done—making sure that we have the right pricing in place on behalf of the customers, making sure that our service levels are where we need them to be—those are the things we continue to work on in China," Chief Financial Officer Tom Szkutak said during a conference call.

"Is it a large investment? Yes, it is. And that investment has increased over the past several years."

Shares climbed in extended-hours trading. (Click here to get the latest quotes.) The stock rallied nearly 4 percent in the regular session ahead of the earnings report.

Szkutak added that Amazon was "encouraged" by the weekly growth in Prime users, even after the company increased the price of the service by $20 last month.

Shares of Amazon, which is also aggressively expanding its lineup of devices and computing services to sustain its growth pace, were little changed in after-hours trading.

The Seattle-based company's first-quarter revenue rose 23 percent to $19.74 billion, boosted by North American sales. This bested the average Wall Street estimate of $19.4 billion, according to Thomson Reuters I/B/E/S. Amazon reported earnings per share of 23 cents, in line with expectations.

Operating margins were predictably razor-thin at around 1 percent. Amazon is spending big on a range of projects, including developing its own original shows and video games, as its core retail business comes under pressure.

"They continue to struggle with the level of profitability they should be seeing, but how can you do better when you're 'investing' for the future?" Forrester Research analyst Sucharita Mulpuru said in an email.

The company is also moving more forcefully into hardware with the debut of its Fire TV video streaming box, as well as a long-rumored smartphone.

First-quarter operating expenses shot up by 23 percent. Amazon's fulfillment costs rose 29 pct, while its technology and content spending was up 44 percent.

But Amazon faces a few near-term hurdles, including new laws in several states forcing the company to collect sales taxes. A recent study showed Amazon sales fell 10 percent in such states, and analysts said this was one factor that pinched Amazon's unit sales growth over the last two years.

The e-commerce company also faces heightened competition abroad from rivals such as Alibaba, which is laying the groundwork for what could be the largest initial public offering for a technology company.

The first-quarter report comes as Amazon tries to build the case for its Prime service after hiking its annual fee to $99 from $79 last month. Prime users get unlimited two-day shipping, access to streaming video and other perks.

This week alone, Amazon unveiled two initiatives to stem defections, including a deal to stream older shows from HBO, the premium cable channel owned by Time Warner.

—By Reuters

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