Amazon Releases Quarterly Financials and Stays the Course: Sacrificing Short-Term Profits in Its Successful Pursuit of Increased Market Share and Astonishing Sales Growth

Amazon.com (AMZN) announced second-quarter financial results today, with net sales increasing 29% to $12.83 billion, compared with $9.91 billion in second quarter 2011. Nothing surprising there, as the company has been on an astonishing tear of sustained sales growth for several years.

The big surprise for many was that, in a strong sign that investors are finally beginning to understand what the company is all about, the stock market did not react negatively to the company’s news that its net operating profit fell 96% to $7 million, from $201 million in the year-ago quarter. Amazon also said it expects to lose money in the third quarter or 2012.

It was not long ago that such a financial report would have sent Amazon’s share price plummeting, even if only for a few hours. As of 7 pm EST today, Amazon shares had risen over $2 to $222.40 in after-hours trading, after closing the regular session up $2.96 to $220.01.

For the last couple of years especially, Amazon has been shaving product prices wherever possible in order to build its customer base and market share, while plowing large investments into product fulfillment centers, physical and virtual distribution channels, and manufacturing infrastructure for its various Kindle and Kindle Fire units.

We’ve been saying here at KND for well over a year that Amazon is positioning itself to capture something very close to an unprecedented 50% retail market share across all formats in the U.S. book trades by the end of 2013. In addition to whatever it is accomplishing across its remarkable and relentlessly expanding array of other product lines, we suspect that that kind of market share will have far more lasting benefits for Amazon and its investors than a few million here and there in 2012 quarterly profits.

Attaining that kind of market share will also mean continued and increasing scrutiny of Amazon by the same folks at the Justice Department who currently have their sights trained on Apple and the agency model publishers. Ironically, it’s the combination of that scrutiny and Amazon’s own corporate commitment to innovation, efficiency and its big-tent, customer-experience business model that provides some basis for optimism that its growing market dominance will actually continue to have positive effects for readers, authors, and consumers.

Here are the guts of Amazon’s press release this afternoon:

Amazon.com Announces Second Quarter Sales up 29% to $12.83 Billion

SEATTLE–(BUSINESS WIRE)–Jul. 26, 2012– Amazon.com, Inc. (NASDAQ:AMZN) today announced financial results for its second quarter ended June 30, 2012.

Operating cash flow was $3.22 billion for the trailing twelve months, compared with $3.21 billion for the trailing twelve months ended June 30, 2011. Free cash flow decreased 40% to $1.10 billion for the trailing twelve months, compared with $1.83 billion for the trailing twelve months ended June 30, 2011.

Common shares outstanding plus shares underlying stock-based awards totaled 468 million on June 30, 2012, consistent with 468 million one year ago.

Net sales increased 29% to $12.83 billion in the second quarter, compared with $9.91 billion in second quarter 2011. Excluding the $272 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have grown 32% compared with second quarter 2011.

Operating income was $107 million in the second quarter, compared with $201 million in second quarter 2011. The unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter on operating income was $8 million.

Net income decreased 96% to $7 million in the second quarter, or $0.01 per diluted share, compared with net income of $191 million, or $0.41 per diluted share, in second quarter 2011. The second quarter 2012 includes $65 million of estimated net loss related to the acquisition and integration of Kiva Systems, Inc.

“Amazon Prime is now the best bargain in the history of shopping – that is not hyperbole,” said Jeff Bezos, founder and CEO of Amazon.com. “We successfully launched Prime seven years ago with free unlimited two-day shipping on one million items. The price of annual membership was $79. Since then, Prime selection has grown to 15 million items. We’ve also added 18,000 movies and TV episodes available for unlimited streaming. And we’ve added the Kindle Owners’ Lending Library – borrow 170,000 books for free with no due dates – it even includes all seven Harry Potter books. What hasn’t changed since we launched Prime? The price. It’s still $79. We’re very grateful to our Prime members, and thank them whole-heartedly for the business and for the word-of-mouth that has made this program grow.”

Highlights

  • Kindle Fire remains the #1 bestselling product across the millions of items available on Amazon.com since launch. Over this same period, the top 10 selling items on Amazon.com were digital products – Kindle, Kindle books, and accessories.
  • Kindle Owners’ Lending Library has grown to over 170,000 books available to borrow for free as frequently as a book a month, including many titles exclusive to Amazon. Additionally, customers can now borrow all seven Harry Potter books in English, French, Italian, German and Spanish.
  • During the quarter, 20 of our top 100 bestselling Kindle titles were from Kindle Direct Publishing authors.
  • Amazon expanded its catalog of title offerings for Prime Instant Video to more than 18,000 movies and TV episodes, announcing licensing agreements with Paramount Pictures and MGM, for titles including Braveheart, Forrest Gump, Mean Girls, Nacho Libre, Clueless, Moonstruck, Rain Man, Silence of the Lambs, Species, Stargate and many more.
  • Amazon.com announced that Prime Instant Video is now available on the Xbox 360 console. Customers can now access Amazon video content through Kindle Fire, PlayStation 3, Mac or PC, or on a TV using either a compatible connected device such as a Blu-ray player or a Roku or directly on compatible Smart TVs.
  • Amazon’s LOVEFiLM, the leading European film and TV subscription service, announced new multi-year agreements with Twentieth Century Fox Television Distribution and NBCUniversal International Television Distribution, providing LOVEFiLM members in the U.K. exclusive streaming access to movies and TV series from the studios, including Despicable Me, Green Zone, and Robin Hood. The agreements are the latest in a long line of exclusive content deals announced by LOVEFiLM, including agreements with Disney, Sony Pictures, Warner Bros., Entertainment One and STUDIOCANAL.
  • North America segment sales, representing the Company’s U.S. and Canadian sites, were $7.33 billion, up 36% from second quarter 2011.
  • International segment sales, representing the Company’s U.K., German, Japanese, French, Chinese, Italian and Spanish sites, were $5.51 billion, up 22% from second quarter 2011. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 28%.
  • Worldwide Media sales grew 13% to $4.12 billion. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 15%.
  • Worldwide Electronics and Other General Merchandise sales grew 38% to $8.16 billion. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 42%.
  • Amazon.com announced that developers can now submit mobile apps for distribution through our upcoming appstore launches this summer on the Company’s U.K., German, French, Italian and Spanish sites. In just over one year, the Amazon Appstore on www.amazon.com has grown to tens of thousands of apps and games. For additional information, visit https://developer.amazon.com/welcome.html.
  • Amazon.com introduced “GameCircle,” an all-new gaming experience for Kindle Fire, and released a series of APIs for developers to add this new experience to their games. GameCircle offers gaming customers a series of features such as achievements, leaderboards, and sync that make gaming even more fun, convenient and social on Kindle Fire. The newly-released GameCircle APIs will help game developers quickly and easily integrate their games with GameCircle, allowing them to grow their business by reaching new customers and keeping them engaged. For additional information, visit http://amazon.com/gamecircle.
  • AWS relaunched AWS Support with the expansion of free support for all AWS customers, a reduction in pricing on premium support plans and adding multiple new features to help customers better interact with and improve their use of AWS, including chat functionality and proactive alerts when opportunities exist to save money, improve system performance, or close security gaps. The price reduction marked the 20th time AWS has lowered prices since its launch in 2006. For additional information, visit http://aws.amazon.com/premiumsupport.
  • Amazon announced the Amazon Career Choice Program, providing employees with a resource for building the job skills needed for today’s most in-demand and well-paying careers. For employees who’ve been with Amazon as little as three years, the program will pre-pay 95% of the cost of courses such as aircraft mechanics, computer-aided design, machine tool technologies, medical lab technologies, nursing, and many other fields.

Financial Guidance

The following forward-looking statements reflect Amazon.com’s expectations as of July 26, 2012. Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce and the various factors detailed below.

Third Quarter 2012 Guidance

  • Net sales are expected to be between $12.9 billion and $14.3 billion, or to grow between 19% and 31% compared with third quarter 2011.
  • Operating income (loss) is expected to be between $(350) million and $(50) million, down from $79 million in the comparable prior year period.
  • This guidance includes approximately $275 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions, investments, or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates.

A conference call will be webcast live today at 2 p.m. PT/5 p.m. ET, and will be available for at least three months at www.amazon.com/ir. This call will contain forward-looking statements and other material information regarding the Company’s financial and operating results.

These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, in addition to the factors discussed above, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, fulfillment center optimization, risks of inventory management, seasonality, the degree to which the Company enters into, maintains and develops commercial agreements, acquisitions and strategic transactions, and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risks related to new products, services and technologies, system interruptions, government regulation and taxation, payments and fraud. In addition, the current global economic climate amplifies many of these risks. More information about factors that potentially could affect Amazon.com’s financial results is included in Amazon.com’s filings with the Securities and Exchange Commission (“SEC”), including its most recent Annual Report on Form 10-K and subsequent filings.

Our investor relations website is www.amazon.com/ir and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics), and select press releases and social media postings.

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2 Responses to Amazon Releases Quarterly Financials and Stays the Course: Sacrificing Short-Term Profits in Its Successful Pursuit of Increased Market Share and Astonishing Sales Growth

  1. Nancy Ingram on July 26, 2012 at 9:09 pm

    Thanks for info. Please register me for a Kindle Fire.I have several books from you to read, just haven’t had time yet. One day soon.

  2. The Kindle Chronicles - TKC 208 Jeff Bezos on July 27, 2012 at 2:20 pm

    [...] fell by a whopping 96 percent compared with last year’s quarter, but the stock price goes up. Stephen Windwalker explains [...]

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