A slow road ahead for Amazon.com

Amazon.com reported a smaller-than-expected loss in its first quarter Wednesday, losing $36.
Written by ZDNet UK, Contributor

Amazon.com reported a smaller-than-expected loss in its first quarter Wednesday, losing $36.4m (£21.9m), or 23 cents a share, on record sales of $293.6m. But second quarter sales growth will slow as operating expenses increase "substantially."

First Call consensus expected the online retailer to lose 29 cents a share in the quarter. Its shares closed off 13 to 192 7/8 ahead of the earnings report. But in after-hours trading, the stock fell another 6 7/8 to 186. On a conference call with analysts, CFO Joy Covey said sequential revenue growth since the third quarter of last year has been fuelled by new initiatives that caught on quickly such as music and video sales. Covey added that video sales in Europe boosted first quarter growth, but in the second quarter "there will be no such visible products."

"We expect our second quarter revenue growth to be below historical trends," said Covey. Meanwhile expenses and losses will increase.

The $293.6m in sales was within the range most analysts had expected. It's also a whopping 236 percent improvement versus the year-ago quarter when it lost $9.2m, or 7 cents a share, on sales of $87.3m.

The company did not break down music, video or its core book sales.

On an operating basis, Amazon.com lost $30.6m, or 10 cents a share. Covey said operating losses will be as much as two-and-a-half times current levels as the company pursues additional investments.

Amazon.com reported a dramatic increase in customer accounts compared to the year-ago period. Amazon.com said it now has more than 8.4 million accounts, up 250 percent from the 2.3 million it had in the same quarter last year.

Repeat customer orders accounted for more than two-thirds of all orders processed in the quarter. "Brand-building efforts outrank bottom line performance in (Amazon.com's) hierarchy of priorities," said Henry Blodget, an analyst at Merrill Lynch in a research report. "Investors who believe in this long-term strategy and opportunity should own the stock." Last quarter, Amazon.com lost $46.4m, or 30 cents a share, on sales of $252.8m.

Amazon.com, looking to go head-to-head with eBayfor booming online auction market, debuted its Amazon.com Auctions in March. Officials said auctions won't add much to revenue in the near future and won't boost margins. In fact, auctions may take away from the bottom line without helping the top line. "Auctions will be in investment mode for a long time," said CEO Jeff Bezos. Nevertheless, Bezos added that he was pleased with auctions and said it was "off to a very fast start -- we had more participants during our first month then even with music."

Earlier this week, Amazon.com acquired three more Internet companies to get their hands on hard-to-find books and music products. Operating expenses will continue to increase because of aggressive expansion plans and investment in distribution centers and other initiatives. The theory according to Covey is to "err on the side of overcapacity."

Although officials said costs -- and losses -- would balloon, they didn't offer much guidance on whether the company would maintain its current buying spree. "It's hard to know in advance about acquisitions because it's on a case-by-case basis," said Bezos. First Call consensus expects it to lose 91 cents a share in the fiscal year.

The company said it was looking to add to its current headcount of about 3,000 employees, not including temps. Bezos said the company was struggling with "people bandwidth." Bezos added that Amazon.com was looking for a chief operating officer and a chief financial officer to replace Covey. Bezos said Covey will manage Amazon.com's acquisitions and rapid growth in a position known as chief strategist. According to Bezos, the company could ramp up much easier if it didn't have "executive bandwidth constraints."

Amazon.com shares moved up to a 52-week high of 216 ½ earlier this month after trading at 12 13/16 in June. Fourteen of the 19 analysts following the stock maintain either a "buy" or "strong buy" recommendation.

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