Amazon rises as profit offsets concern over higher spending

[SAN FRANCISCO] Jeff Bezos showed Amazon.com Inc. can still pull out a profit, though the chief executive officer made no promises that he'll do it again next quarter.

The stock soared 14 per cent after the online retailer reported a fourth-quarter profit of US$214 million on sales of US$29.3 billion, following two straight periods of losses. The results, posted Thursday after the markets closed, helped blunt investor concerns that Bezos was spending too much on initiatives including speedier package delivery and original video programming - instead of making money.

Amazon still ended 2014 with its first annual loss in at least 12 years. Executives said the spending would continue, with plans to keep building data centers for the cloud-computing division and fulfillment centers for faster delivery of goods. For the first quarter, Amazon forecast an operating loss of US$450 million to a gain of US$50 million, which even at the high end is less than the US$146 million profit from the first quarter of 2014.

Still, "it's great for them to show profitability," said Colin Gillis, a New York-based analyst for BGC Partners. "The market is obviously loving that." The shares surged to US$354.53 at the close in New York, the highest since July. The stock fell 22 per cent last year, compared with an 11 per cent gain in the Standard & Poor's 500 Index.

For the fourth quarter - typically the most lucrative for the Web retailer because of the holiday shopping season - net income declined 12 per cent from US$239 million a year earlier while sales rose 15 per cent from US$25.6 billion. Operating expenses climbed 15 per cent to US$28.7 billion, which was a slower rate of increase than the 20 per cent jump a year earlier.

Excluding an US$895 million hit from foreign exchange rates, net sales increased 18 per cent from a year ago, the company said. Gross margin was 29.5 per cent, up from 26.5 per cent.

Amazon also forecast first-quarter sales of US$20.9 billion to US$22.9 billion, falling short of analysts' average projection of US$23 billion.

"It felt like Amazon had a great holiday because they started early and they carried strong through," said Scot Wingo, CEO of ChannelAdvisor, which helps third-party merchants sell on Amazon.

Big spending from Web companies has been a theme this earnings season. Facebook Inc. this week said spending will jump 55 per cent to 70 per cent in 2015 as CEO Mark Zuckerberg invests in messaging, hiring and new technologies such as artificial intelligence. Alibaba Group Holding Ltd. posted quarterly revenue that missed estimates as the Chinese e-commerce company's push into mobile curbed its advertising sales growth. Google Inc. reported its operating expenses jumped 35 per cent from a year ago.

Amazon has long invested heavily to tie people to the e- commerce website. Most recently, the company built new warehouses and sorting centers to speed delivery times, unveiled interactive speaker Echo and pushed deeper into corporate technology with an e-mail and calendar service for professionals dubbed WorkMail.

To help with spending, Amazon obtained a US$2 billion credit line with Bank of America Corp. in September and last month sold US$6 billion in debt in its biggest bond offering.

Chief Financial Officer Tom Szkutak said on a conference call that Amazon will break out the cloud-computing unit, called Amazon Web Services, into its own category when it reports results next quarter. The business has traditionally been grouped within the "North America, Other" division.

"We just think it's an appropriate way to look at our business in 2015," Szkutak said.

He said investors should anticipate more spending on data centers and fulfillment centers this year. The spending is paying off, he added. Amazon's Prime fast-shipping program, which costs US$99 annually, experienced 53 per cent growth in 2014, on a base of tens of millions of people, the company said.

Amazon has also been putting money into original video programming for its Prime streaming service, including recently announcing it will begin making feature-length movies for theaters and hiring director Woody Allen to helm a new half-hour TV series. The programming has attracted more people to Amazon, who are then becoming e-commerce customers and buying goods from the website.

"What we see is customers who come in through our Prime pipeline for video for a free trial, and those customers are converting at a faster rate," Szkutak said.

BLOOMBERG