Amazon Reports a Profit, Citing Prime Service as Key

Investors were thrilled. Shares in Amazon surged more than 13 percent Thursday in after-hours trading.

Even analysts bullish on Amazon were surprised. "It's a lot of enthusiasm from a few rays of hope," Colin Gillis of BGC Partners said.

For years, Amazon was a story about growth. It invested in warehouses and faster delivery systems, in making movies and building devices. Wall Street was willing to dismiss profits as long as sales continued to jump. If Amazon achieved the kind of domination it was striving for, the results would be worth it.

The fourth quarter of 2014 reversed that pattern. Profits were much better than forecast, while revenue was slightly weaker.

Analysts were anticipating 17 cents a share, according to Thomson Reuters. When the retailer earned nearly three times that - 45 cents - on improved margins, it was a sign that maybe the sizable profits that all true believers in Amazon expect are on the way at last.

Profits, however, were down from the fourth quarter of 2013, when Amazon earned 51 cents a share. Revenue was up 15 percent to 29.33 billion. But analysts were expecting $29.67 billion (roughly Rs. 1,83,353 crores).

The good news was in the details. Amazon's delivery service, Prime, is surging. Amazon said its worldwide paid membership in Prime rose 53 percent in 2014. A price increase for Prime to $99 apparently discouraged few customers.

Prime is the key to Amazon's attempt to build an ecosystem where people use Amazon devices to watch Amazon-produced content that is surrounded by ads for Amazon products that are delivered by Amazon's fleet of drones.

Analysts say they think Prime has around 40 million members, although the company declined Thursday to give a number or offer any hard facts about how much a new Prime member increases his shopping.

"They do step up their purchases very considerably," the company's chief financial officer, Thomas J. Szkutak, said in a conference call.

One question investors always have about Amazon will soon be solved. The company said it would start breaking out numbers for its cloud computing platform, AWS, after the current quarter. AWS is growing much faster than Amazon as a whole, although price wars with other leading players are presumably cutting into profitability. Revenue in the "other" category, which is dominated by AWS, was $1.74 billion (roughly Rs. 10,752 crores) in the fourth quarter, up 41 percent.

Operating margin in North America rose from 0.7 percent in the third quarter to 5.4 percent in the fourth. Extend that across the entire business, Gillis said, and you can see how the retailer would finally bring home some serious money.

"It demonstrates the leverage potential in the model," he said.

If you try many things, Amazon's chief executive, Jeff Bezos, recently said, some will work out. AWS was one of those. Another might be advertising.

In a note before the earnings release, Gillis said he was impressed with the potential of expanding Amazon's advertising business, saying it "has the ability to present targeted messages based on deep data the company has, including past purchases, geographical location and content habits."

Amazon shares rose nearly $8 to $312 in regular trading. The stock rose in after-hours trading above $350. Amazon's record price, reached a year ago, was $406.

Another analyst, Sucharita Mulpuru of Forrester Researcher, saw less cause for excitement.

"The numbers are nothing to do a jig about," she said. "If anything, they establish that Amazon's numbers will always be low margin."

As Amazon builds for the future and expands wildly, its recent earnings reports have disappointed analysts and investors. When the third-quarter numbers came in short, management sounded a bit chastened and said new opportunities would be carefully chosen. Szkutak echoed that note Thursday.

But Amazon hardly acts like a company restraining itself. In the entertainment field alone, it signed Woody Allen to make his first television series, announced it would release some of its films in movie theaters and held debuts of 13 new pilots.

Even as the giveways pile up, Amazon's media sales in North America are struggling. They were up 1 percent in the quarter from 2013. Amazon blamed the introduction in 2013 of new gaming consoles, which made for tough comparisons in 2014.

For the current quarter, Amazon's enthusiasm was typically muted. It estimated it could lose as much as $450 million (roughly Rs. 2,780 crores) and make no more than $50 million (roughly Rs. 308 crores). In 2014 it had a profit of $146 million (roughly Rs. 900 crores).

Despite Amazon's tremendous growth, which has made it one of the biggest retailers in the United States, it has only a small slice of the global e-commerce pie.

According to the research firm eMarketer, worldwide e-commerce totaled $1.3 trillion in 2014, up 22.2 percent from 2013. Amazon accounts for slightly over 5 percent of that - a remarkable achievement for one company, but much less than its dreams.

Among the big e-commerce battlegrounds in the near future will be India. Amazon said Thursday that it was India's largest e-commerce operation, just two years after opening.

"We think it's very, very early," Szkutak said. "We are investing."

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