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Amazon’s “Investment Mode” Continues As Profit Dips

Every time Amazon has a quarterly earnings report, there’s just one question on investors’ minds: Will the eCommerce giant produce a profit?

Last quarter, with its strong Prime membership leading the way, Amazon surprised many by posting a quarterly profit of $214 million. It seemed, at least temporarily, that Jeff Bezos’ “investment period” strategy was paying off. 

Well, Bezos might have some explaining to do again as Amazon’s first quarter earnings posted another loss yesterday (April 23), bringing the company back into the red to the tune of a net loss of $57 million.

Sure, on $22.72 billion in sales, $57 million is a pimple. And, for sure, Amazon has posted worse, like its third quarter earnings last year when it produced an operating loss of $544 million, despite having $20.58 billion in sales. Still, Amazon appears to be deep into its investment mode again. Sales, overall, for the first quarter were strong, 15 percent more than this time last year ($19.74 billion).

Yet despite the profit loss, a majority of the earnings call focused on three key factors that Amazon has been working hard to promote: Its Amazon Web Services, Amazon Prime and its international growth in India and China — which is being led by its 109 fulfillment centers around the world.

Amazon Prime

While inquiring minds want to know the specifics on Prime membership and growth, in typical Amazon fashion, CFO Thomas Szkutak reminded the group that Amazon doesn’t break out specific metrics on its memberships, but did applaud it as one of Amazon’s most recent success points. Szkutak also didn’t provide guidance on what Amazon has in store for its Prime Now expansion, or its fulfillment centers, other than saying they’ve seen value in the investments in the one and two-hour delivery platforms.

“The response has been great. We will point out that our operations network that was — has been building for the last 20 years helps make Prime Now a viable proposition for us and scale makes it possible,” Szkutak said. “Really so far customer responses are great.”

The most recent public data about Prime from Amazon was that it had gained 10 million new Prime members during the holiday season, but Amazon hasn’t provide an update since. Recent data from Consumer Intelligence Research Partners shows that Amazon Prime members outspend non-prime members 3-to-1. It’s also estimated that 45 percent of Amazon users are Prime members.

Amazon’s quarterly profit dip may have been expected, and by looking at Szkutak’s comments last quarter about how 2015 would shape up, it’s easy to see that even he was skeptical that Amazon could hold onto the profit it produced last quarter. Last quarter Szkutak said Amazon would be “driving fixed expenses,” and working on “efficiency projects,” and “productivity measures” with its fulfillment capacity in 2015. But with another quarterly loss, the obvious question will likely be raised by investors: Is Amazon expanding too rapidly and too broadly?

We’ll find out as 2015 unfolds. Although many of Szkutak’s comments were about investments, it was also reminded that heavy investments are the factors impacting the profit margins. If there was one word that summed up the questions about profit or Amazon’s projection for future growth, it would be the word “investments.”

“We are making some great investments for the long-term and that’s really what’s reflected in the operating results that you are seeing. …So it is certainly impacting the operating margins both for North American and International,” Szkutak said. “We’re going globally to support Prime platform on all of those things that we mentioned — video content, original content, Prime Now, category expansion, investing on behalf of FBA, which also helps Prime devices. Those are all intertwined and certainly part of that.”

Amazon also recently invested in its Dash Button and Dash Replenishment services — which involves consumers using a small button that Prime customers can place in their home and use to reorder frequently used household items. While it was deemed as gimmicky by the mainstream press, Amazon is banking on its belief that it’s another way to connect consumers to commerce as it simultaneously disrupts the grocery business and courts branded products.

International Expansion

Outside of the financial logistics, Szkutak and Brian Olsavsky, Amazon’s vice president of finance for the global consumer business, shared how Amazon Prime continues to be its chosen platform — particularly as it looks to expand across China and India. India, in particular was highlighted as a major investment area for the company, but not many specifics were provided as to how, where or why Amazon sees big potential in the region.

“We’re going to continue feed the Prime platform as we talked about [and] continue to add selection in a lot of categories,” Szkutak said. “We’re also very excited about India, if you take a look at our results for – from an operating profit standpoint, you see that it was approximately negative 76 million on a dollar basis. If you back out at exchange that’s approximately breakeven, included in there we certainly have a sizable step up in investment in India. And we’re super excited from what we see there right now. We think it’s a very big opportunity and we’re investing appropriately for that big opportunity.”

Answering an analyst’s question about investments in India versus China, Szkutak spoke about some of the major projects that Amazon has underway in the region. This includes an Amazon seller app that makes it easier for merchants to update their inventory, source and list new items on Amazon and respond quicker to consumers. Amazon also recently launched a pilot service that delivers everyday essentials to customers within two to four hours in India.

“They are very different,”Szkutak said about comparing India to the China market. “You’ll see the growth rate in India is very rapid. We talked about last year and its increasing investment. I think the biggest differences there is focused on sellers and the connection of sellers. A big part of the challenge there is helping sellers all across India to succeed and grow their online businesses. …We’ve launched a new app for that. So that helps them manage our inventory better and also respond to customer inquires. So that’s probably the biggest difference that we see between India and China. But it’s still very, very early on in India.”

Amazon Web Services

Outside of its major investment in China, and continued investments in Prime, one key theme throughout Amazon’s earnings was also a major emphasis on its Amazon Web Services platform, which may be one key factor in helping Amazon grow back some of its profits. This quarter AWS also launched several new features to make it easy for mobile developers to use Lambda for mobile, tablet and Internet of Things applications.

“Amazon Web Services is a $5 billion business and still growing fast — in fact it’s accelerating,” said Bezos, Amazon’s CEO, in the earnings press release. “Born a decade ago, AWS is a good example of how we approach ideas and risk-taking at Amazon. We strive to focus relentlessly on the customer, innovate rapidly, and drive operational excellence. We manage by two seemingly contradictory traits: impatience to deliver faster and a willingness to think long term. We are so grateful to our AWS customers and remain dedicated to inventing on their behalf.”

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