Amazon Misses at Earnings; Maintains Long Term Growth Spending Plans

Amazon Headquarters Seattle, WA
Amazon Headquarters Seattle, WA

Seattle, WA    On Tuesday online retailer giant Amazon posted disappointing quarterly revenues and guided lower for the first quarter of 2012. Amazon shares tumbled 7.56% in after hour trading. Amazon’s revenues fell nearly 1 billion in the 4th quarter to $ 17.4 billion,  easily missing analysts’ estimates of 18.3 billion, according to Bloomberg survey.

Net income fell 57% to 177 million or .38 cents per share, down from .91 cents per share last year while Amazon’s year over year revenues grew by 35%.

Amazon has become the world’s largest e-commerce retailer by offering discounted merchandise, digital services, and no state sales taxes across U.S. states where they don’t have fulfillment (distribution) centers. Expectations were high that Amazon had a great holiday retail season. But Colin Gillis, an analyst with BGC Partners, said the company “does not really give a good answer” as to why its earnings fell short of expectations.

Amazon Sales Figures- “Covered in Seattle Mist”

At yesterday’s conference call, Amazon executives refused to disclose Kindle sales figures for the quarter except to report that sales of Kindle devices tripled in one year. Since Amazon did not release the Kindle numbers for last year either, it is difficult to determine the previous level where the tripling did occur. 

During Tuesday’s conference call, Amazon executives blamed Europe’s slowing economy for hurting their profit margins. “We are seeing that its softer”  Amazon CFO Thomas Szkutak said. “It’s hard to quantify to high international growth would have been but its soft; we’re all seeing the same thing in terms of reports, its certainly soft.”

High Operating Expenses

Amazon’s operating expenses rose 38% to 17.2 billion. Besides spending more for new fulfillment centers, Amazon continues to make big financial investments to maintain their rich digital content with online books, publishing books, movies, and music. Amazon also subsidizes the Kindle Fire Tablet, a new 7 inch e-reader tablet launced in November 2011, which they sell for a small loss. Piper Jaffray analyst Gene Munster estimates that Amazon loses approximately $10-15 per Kindle Fire.

Amazon sells the Kindle Fire for a slight loss with the expectation that new Kindle Fire subscribers will join Amazon Prime, a $79.00 a year subscription plan that gives new Prime users immediate access to Amazon’s digital video library and free shipping at amazon.com. Amazon also expects to recoup the small loss from the Kindle Fire after new users purchase Amazon products such as books, music, and merchandise from amazon.com. During the past quarter, Prime members increased their numbers by 300% compared to 3Q 2011.

Piper Jaffray Analyst Gene Muster estimates that Amazon loses $11.oo per customer on Amazon Prime after giving away free shipping. Amazon executives have responded by saying that Amazon Prime users triple their spending on Amazon.com after they subscribe, allowing the company to recoup the initial shipping losses. It is unclear whether Amazon’s subsidization efforts to attract subscribers by selling the Kindle Fire and shipping for a loss will actually pay off in the long term and expand their profit margins. The jury is still out.   

Lower Quarterly Guidance

Amazon forecasts $ 12 billion to 13.4 billion in revenues. Analysts expected $ 13.42 billion in revenues. Amazon execs said that the company may record a loss for next quarter.  Estimates provided by Amazon vary from a loss of 200 million to a 100 million profit.

Pacific Crest senior analyst Chad Bartley told Bloomberg West that Amazon’s profits will be challenged in 2012. ” I think that 2012 will be a year of further investments. It will be a challenging year in terms of profits” Bartley said. ” I think it will be a challenging year as it relates to operate profits now that investors will consider about the growth, given the guidance and challenges about growth in Europe” Bartley noted.

 Finally, there are circulating rumors about Amazon launching a new 10 inch Kindle tablet sometime in 2012. Stay tuned here for more details.

* Update- Drivco CEO Sam Hamadeh reports that Facebook’s IPO is expected to raise $ 5 billion.

 

 
About Johnathan Schweitzer 1472 Articles
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