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Posted by Graham Keen on Wed 27th Apr 2011



 
Amazon has issued a confident revenue forecast, leading to hopes its growth in new business areas is providing returns and soothing worries over a slimmer profit margin.
 
Shares were down 1.2 per cent after Amazon reported a 32.8 per cent decline in first-quarter profits. But that was a far cry from the big sell-off when the company last reported quarterly results and shares lost nine per cent.
 
"The concern that people had, that they were going to spend more than the Street was expecting, happened," said Ken Sena, analyst at Evercore Partners. "But when you look at the kind of growth acceleration they are showing on the top line and surpassing pretty much all Street expectations, I think that clearly shows what they are doing makes sense."
 
In recent years, Amazon has fought to win market share through its Prime programme of low-cost delivery of its retail goods and by offering inexpensive electronic books for its Kindle e-reader.
 
More recently, it has invested heavily in areas such as cloud computing and "music lockers" where fans store their music on Amazon's servers, to take on its rivals Google and Apple.
 
Amazon expects that its investing to win market share will work. It forecast current-quarter revenue of $8.85 billion (£5.38 billion) to $9.65 billion, above Wall Street expectations of $8.7 billion, according to Thomson Reuters I/B/E/S.
 
Chief financial officer Tom Szkutak told analysts on a conference call that Amazon has to spend money to develop the technology infrastructure and distribution centres and support its growth. Revenues nearly doubled between 2008 and 2010.
 
For the company's first quarter, which ended 31 March, revenue was $9.857 billion, above the average analyst estimate of $9.57 billion and 38.2 per cent above a year earlier.
 
In contrast, data firm eMarketer estimated that US retail e-commerce sales rose 13 per cent in the quarter compared with a year earlier.
 
Amazon's sales increase was led by a 45 per cent rise in North America. Growth elsewhere was 27 per cent excluding the effect of currency exchange. Szkutak said that would have been 32 per cent if not for Japan's massive earthquake last month.
 
But net income in the first quarter was $201 million, or 44 cents per share - down from $299 million, or 66 cents per share, a year earlier. That was far below the 61 cents expected by Wall Street, according to Thomson Reuters I/B/E/S.
 
The company posted an 18.2 per cent dip in operating profit for the quarter, reflecting the costs of competing in the highly promotional retail environment, with beefed-up investment in its cloud computing services.
 
Shrinking operating margins
 
Operating margin, which Amazon has said is the best gauge of its profitability given the variety of items it sells, came to 3.3 per cent, in the middle of the range it had forecast.
 
Still, that was a significant drop from the 5.5 per cent margin in the year ago quarter.
 
"It's not a revenue problem, it's a profit problem," said BGC Partners analyst Colin Gillis. "But at the end of the day, you've got to remember that these guys are a discount retailer."
 
Amazon said it expects operating profit in the current quarter of $95 million to $245 million, after costs of $180 million for stock-based compensation and amortisation of assets. Amazon had operating profit of $207 million in the second quarter last year
 
Phil Wahba

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