Amazon growth slows, but profit margins expand

Amazon.com Inc's revenue growth slowed in the first quarter as the world's largest Internet retail struggled overseas, but margins jumped on lower shipping expenses and the expansion of more profitable new businesses.

Amazon shares fell 1.9 percent to $269.43 in after-hours trading on Thursday following the results.

"The message there is North America was better than expected but international was softer. The question is 'Is this a reflection of macro trends in Europe, or is there something else going on there?'" said Telsey Advisory Group analyst Tom Forte.

Europe's lackluster economies are weighing on corporate sales in the region - even for fast-growing e-commerce businesses. EBay Inc, Amazon's main rival, reported disappointing results last week and noted European weakness.

Amazon's revenue rose 22 percent to $16.07 billion, propelled by growing sales of digital content, cloud-computing services and gains in its main retail business. But it was a decline from 36 percent growth in the first quarter of 2012.

International revenue rose 16 percent in the most-recent quarter, year-over-year, down from a 31 percent growth rate in the same period of 2012.

During a conference call with analysts on Wednesday, Chief Financial Officer Tom Szkutak was peppered with questions about slowing growth.

"There is some softness from a macro standpoint that others are seeing," the CFO said.

Amazon has also struggled to grow in China and the CFO told analysts the company is still in "investment mode" in that country.

Szkutak reported that total year-over-year unit growth, which measures the number of items Amazon sells, was 30 percent in the first quarter, down from 49 percent in the first quarter of 2012.

"Unit growth is slowing which disappointed some," said Ben Schachter, an analyst at Macquarie. "The law of large numbers is affecting Amazon too. You can't grow 100 percent forever, otherwise you become the universe."

Gross margins a bright spot
Amazon forecast second-quarter revenue of $14.5 billion to $16.2 billion and operating results from break-even to $350 million. The latter guidance excludes stock-based compensation expenses and other items such as amortization of intangible assets.

Wall Street was looking for second-quarter revenue of $15.94 billion and operating results of $452 million, according to Mark Mahaney, an analyst at RBC Capital Markets.

Despite weaker growth and a cautious forecast, Amazon's results showed that the company is becoming more profitable.

Gross profit margin, a closely watched measure of profitability, came in at a better-than-expected 26.6 percent, compared with 24 percent a year earlier.

The first-quarter gross margin was the highest in at least a decade, according to Scott Tilghman, an analyst at B Riley & Co.

Amazon is building distribution warehouses closer to customers, reducing shipping costs. It has also been charging third-party merchants on its marketplace higher fees for shipping and warehouse storage.

In the first quarter, net shipping costs were 4.7 percent of sales, down from 5.1 percent a year earlier.

Moving into other areas is also boosting margins.

The company 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 it has expanded into other businesses that are potentially more profitable, including cloud computing, advertising, 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.

Amazon's web services (AWS) and advertising businesses are reported in a segment the company calls "other." Revenue from this area surged 59 percent to $798 million in the quarter.

"At the end of the day, at least on that (profit) basis, they are showing some very good progress," said Evercore analyst Ken Sena. "You are seeing benefit from the higher-margin Amazon Web Services business, and also higher-margin third-party marketplace business."

© Thomson Reuters 2013