The world’s largest online retailer, Amazon (NASDAQ:AMZN), posted a loss of $274 million in the July-September period, earnings for which were released on October 25th. That’s down from earnings of $63 million, a year earlier. Though expected, it was Amazon’s first loss since July 2003. Revenues, however grew 27 percent to $13.81 billion, from $10.88 billion. The company attributed the loss to its investments in LivingSocial, its Kindle e-reader and the tablet business as well as in geographic locations such as China and in video content. Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Netflix (NASDAQ:NFLX).
Electronic and General Merchandise lead revenue growth
The EGM division continues to lead revenue growth and increased 36% to $8.6 billion. Worldwide, the contribution of EGM to overall sales increased to 62% from 58%. The North America segment still contributes the majority of revenues from EGM sales which accounts for 64% of total North America sales. Internationally, EGM sales grew 30% to $3.5 billion and now represent almost 60% of international revenues, up from 54%.
Media revenues also grew at 11% during the quarter to $4.6 billion. The division recorded 15% growth in North America and 7% internationally. North America and International operations contribute equally to Media revenues. Given Amazon’s heavy investments in the Kindle device range, we expect e-content sales to increase significantly going forward and drive revenue growth for Amazon. The rapidly growing smartphone and tablet user base should also help drive e-content sales directly benefiting Amazon, which is one of the leaders in the space.
Pressure on margins
Amazon has already taken the brunt of the hit to its margins due to heavy Kindle sales and increased price competitiveness from brick and mortar retailers. We expect the margins to stay under pressure going forward as the effects of large investments in fulfillment centers become apparent.
The company is being forced to collect sales taxes in an increasing number of states which will negatively impact its margin as it tries to maintain its pricing advantage. With its case against fixed end-pricing of e-books by certain publishers settled in its favor, and new deals for its movie streaming services in place, the company is well placed to mitigate the pressure on its margins through increased e-content sales. Combined with its ongoing efforts to reduce its operating expenses, the higher margins on e-content could help the company stem the decline in its margins, and maybe even improve them a bit.
Just in case you didn’t know… (here’s Amazon in a nutshell)
Amazon is one of the first companies to sell products deep into the long tail by housing them in numerous warehouses and distributing products from many partner companies. Amazon directly sells or acts as a platform for the sale of a broad range of products. These include books, music, videos, consumer electronics, clothing and household products. The majority of Amazon’s sales are products sold by Amazon, though many are from third-party sellers.
Since 2004, Amazon has begun to rapidly expand its web services arsenal. Products such as Amazon EC2 (Elastic Compute Cloud) and Amazon S3 (Simple Storage System), Amazon Route 53 have been large successes.
As of Q1 2011, Amazon has approximately 137 million active customers worldwide. It was also reported that there are 2 million merchants selling on Amazon equaling a third of the total listings. North America currently represents 55.4% of sales with the other 44.6% in the International market.