Amazon makes IT spending cool

Wall Street is a funny place. Amazon spends heavily on technology and content for the last two years and all analysts do is whine.
Written by Larry Dignan, Contributor

Wall Street is a funny place. Amazon spends heavily on technology and content for the last two years and all analysts do is whine. Now Amazon has reported two straight quarters of stellar earnings and analysts appear to be big backers of the e-commerce giant's capital spending.

That's what blowout earnings will do for you.

Amazon reported net income of $78 million, or 19 cents a share, in its second quarter. Revenue was $2.89 billion, up 35 percent from a year ago. Operating margins were 4 percent, compared to 2.2 percent a year earlier. According to Thomson Financial, Amazon was expected to report earnings of 16 cents a share on revenue of $2.81 billion.

The company also increased its earnings and sales outlook for the third quarter and the year.

Predictably, nearly every analyst upgraded the stock on Wednesday. And Amazon shares at last check were up more than 20 percent to prices that are downright year 2000-ish.

On Monday I asked whether Amazon is a platform or just a retailer. The answer seems to be clearly in the platform camp. Third party sellers are coming to Amazon and the company is making good money with its Amazon Prime membership program.

But here's what's most telling about Amazon's quarter. It is actually making investing in your business look good. Go figure.

Deutsche Bank analyst Jeetil Patel writes in a research note:

Amazon's current financial model enjoys several positive characteristics that are not inherent to other companies. The company maintains an extraordinarily high level of technology and content spending, representing an advantage in investing against the continued rapid growth/development of the Internet. (Note that other companies such as Yahoo! and eBay look to have underspent on technology/content spending and are therefore rapidly losing growth momentum).

Hmm. Maybe this is why Yahoo's Jerry Yang is talking so much about the company's "investment mode."

Edward Weller, an analyst at ThinkEquity Partners, notes that Amazon's investments are paying off. These investments are bringing on new customers and boosting profits. Today Amazon is bringing in third party sellers and tomorrow it will have a mass of Web services clients. "Amazon's ROI's have made astounding progress," says Weller.

The message: Spend all you want on capital spending. Just make sure there's a payoff so Wall Street can fawn over you later.

Other notable items:

Amazon has more than 265,000 developers for its Web services as of June 30. That's up 25,000 in the first quarter. On the earnings conference call, here's what CEO Jeff Bezos had to say:

We are seeing very good early traction in our web services initiatives. It's one of the areas that we have been investing in over the last couple of years. It's very encouraging to see that traction. We've got a lot of great customers, and the team that's doing that is creating a lot of value for those customers. They are making it much easier for those customers to do business.

This customer set is developers. A lot of them are start-up companies. If you are a start-up company building a web scale application, there's a lot of work that has to go into that. A lot of that work is not differentiating. So it's things like picking the right operating systems, getting your data centers set up and entering into contracts, et cetera, et cetera. There are a lot of decisions to be made and it's kind of a price of admission. It has to be done well, but it doesn't actually move the ball forward in terms of creating your differentiated product or service.

We're very optimistic about the long-term potential. It's still very early, but we're working very hard on this, and we think it's, in the long-term, a very important business. We are very, very glad and we feel very lucky to have this new set of customers to work with, these developers.

Amazon's net spending on technology and content for the second quarter was $176 million, up from $151 million a year ago. The company noted that "we continue to invest in several areas of technology and content including seller platforms, web services, and digital initiatives, as well as expansion of new and existing product categories. We are also investing in technology infrastructure so that we can continue to enhance the customer experience and improve our process efficiency."

Amazon CFO Tom Szkutak said on the earnings conference call that technology and content spending will increase in dollars, but be a smaller percentage of sales in the future. 

It's too early to talk about Amazon Unbox and download services. On the conference call, Bezos said:

It's too early for us to discuss any of the traction we're seeing . As you know, we have Amazon Unbox, which has downloadable videos, and have made arrangements with TiVo so that we can offer customers those videos directly to their TiVo Series 2 and Series 3 Internet-connected boxes. Then we have announced but not yet launched an MP3 DRM-free music offering that we're very excited about, but you'll have to wait and stay tuned for that.

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