Thursday (Jan. 29) was a big day for earnings in more ways than one: a surge in holiday sales and Prime memberships helped Amazon post a profit — potentially giving analysts and Wall Street one of the biggest shocks of the week.
Yes, you read that correctly. Amazon posted a profit. And shares of Amazon stock surged nearly 12 percent in after hours trading
The much needed profit gift for investors came as Amazon reported profits of $214 million, with overall operating income at $591 million (up 81 million from Q4 in 2013). That’s a stark contrast to Q3’s operating loss of $544 million on $20.58 billion in sales. Q4 had sales up 15 percent, year-over-year to $29.33 billion. A big part of Amazon’s profit story is CEO Jeff Bezos’ bet on Amazon Prime.
“When we raised the price of Prime membership last year , we were confident that customers would continue to find it the best bargain in the history of shopping. The data is in and customers agree — on a base of tens of millions, worldwide paid membership grew 53 percent last year — 50 percent in the U.S. and even a bit faster outside the U.S.,” said Bezos. Amazon does not break out sales figures from Prime, but did speak about how it helped overall sales increase. “Prime is a one-of-a-kind, all-you-can-eat, physical-digital hybrid — in 2014 alone we paid billions of dollars for Prime shipping and invested $1.3 billion in Prime Instant Video.”
Scot Wingo, CEO of ChannelAdvisor, which provides analytics and other services to online retailers, said that Amazon was able to leverage the 2014 holiday season to make up for its past losses, including problems with FedEx and UPS during the 2013 holiday season that ended up delaying holiday shipments. This holiday season, Amazon extended its Christmas delivery date and ensured customers that its packages would arrive on time.
“They did a really good job of extending the holidays and not repeating the debacle of last year,” Wingo told CNET Magazine.
New data from Consumer Intelligence Research Partners shows that Amazon Prime figures have hit new highs, including spending amounts for members versus non-members. The data shows that Amazon Prime membership, which now numbers 40 million, now spends an average of $1,500 a year, compared with $625 for non-members. Of its customer base, the figures show 45 percent of Amazon users are Prime members. Amazon also reported after its holiday season that it added more than 10 million new Prime members worldwide during its 20th holiday season; the company also saw success with its same-day delivery that Amazon said led to customers ordering 10 times as many items than in 2013.
Colin Sebastian, an analyst at Robert W. Baird, told Bloomberg that the increased sales growth “means they are still gaining share of the e-commerce market, presumably as a result of being an aggressive investor in new areas.”
While the figures reflect a strong ending for the year for Amazon, there could be worry ahead about Amazon’s growth across its core North American market. While growth in that region was 22 percent in Q4, that was down from the 26-percent growth rate that was experienced the year prior. Internationally, Amazon posts a modest 3-percent growth, year-over-year. But for now, Bezos can deflect some of the heat he took last quarter and bask in the positive earnings report, at least for now.
Although Amazon brought some relief for analysts and investors, Amazon’s CFO Thomas Szkutak was vague about how the company would manage growth while maintaining the profit that it restored last quarter. Using general terms like “driving fixed expenses,” and “efficiency projects,” Szkutak didn’t provide many hints into Amazon’s plans for 2015 other than to say it’s working on putting more focus on “productivity measures” and tasks like adding fulfillment capacity to its list for the year. In true Amazon fashion of being vaguely transparent about its plans for the year, Szkutak indicated they would keep stakeholders informed throughout the year.
But that seemed good enough for analysts during the call, who were more focused on the positive for the day — and that was profit.
What Szkutak did hint on, however, was how Amazon has adapted to consumer shift in e-commerce shopping behaviors that has them seeking platforms that enable convenience and speed instead of simply looking at price as a way to attract customers.
“In terms of speed of delivery and convenience, we see that with Prime members. Prime members are buying more. It’s more convenient. They are getting their physical product to them faster versus being not a Prime member. So we certainly see that. So that’s certainly speed of delivery helps. We need to make sure and it’s something that we are always focused on is making sure we have great prices and that’s every single item across categories, across geographies. So it’s something we are focused on,” he said.
“We do think that’s important for customers. And we need to have the selection, be in stock. When a customer comes to our detail page, it matters. And so I don’t view it as a shift. I view it as there is certainly a lot of visibility and transparency around all of these. That’s what shopping and operating a business online does. There is just amount of transparency. We think we like that world. And that’s something that we continue to focus on those inputs so that we can be successful in that world and that’s not something new. That’s something we have been focusing on for a long time.”
Amazon’s Dipping Profit of 2014
Amazon spent most of its third-quarter earnings call justifying how a company can make $20 billion in revenue and still lose money.
Amazon’s Q3 earnings showed the company reported an operating loss of $544 million, despite having $20.58 billion in sales. The loss is more than 20 times that of the $25 million in last year’s third-quarter earnings and was anticipated at that time to grow to $570 million by the next quarter. Luckily for Amazon that didn’t happen.
But longtime Amazon shareholders—and the analysts who ultimately work for them—have seen lots of Amazon losses over the years. The historical difference is that those losses have generally accompanied very strong revenue spikes, massive market share and successful penetration into a huge number of product segments. That is what has allowed the company to plausibly argue that the losses were a result of wise investments, rather than weak management. Amazon also had a costly mistake with its Amazon Fire phone that still had $83 million left in inventory in Q3. In response to an analyst question Thursday, Szkutak gave an update about the phone that didn’t provide much more insight.
“I don’t have really any callout for the Fire phone,” he said in response to the question. “We continue to sell. I had mentioned, we have a little bit over $80 million of inventory at the end of the Q3 and it will continue to sell through that in Q4. In terms of fuel prices, not a lot to callout there in terms of impact on the quarter. Certainly, over a long period of time, if it’s sustainable we should see some benefits there.”
Q1 for Amazon started off the downward spiral for profit as operating income dipped 19 percent to 146 million, and by Q2 Amazon was operating loss of $126 million. And the projections and reality only got worse by third quarter.
Revenue was $260 million less than analysts’ projections in Q3, which is still less than the $340 million revenue miss show in Amazon’s Q4. Investors and analysts questioned, perhaps more than ever: was the e-commerce giant fading and when would it post a profit again?
Amazon has now answered that question with a resounding “yes.”