Amazon Generating Solid Growth

Amazon.com’s (AMZN - Analyst Report) third quarter earnings beat the Zacks consensus by 12 cents. Revenue beat by 8.3%.

Revenue

Revenue for the period was $5.5 billion, up 17.2% sequentially and 27.8% year over year. Revenue exceeded the top end of management’s guidance range of $4.75-5.25 billion (up 2.1% sequentially and up 12.9% year over year).

Approximately 52% of sales were generated in North America, which increased 16.0% sequentially and 23.5% year over year. The balance came from the International segment, which increased 18.5% sequentially and 32.8% year over year.



Segment Details

The North America Media business strengthened considerably, growing 13.4% sequentially and 25.9% from the year ago quarter. The sequential increase came after two quarters of double-digit declines. The business has not recorded any year-over-year declines, despite the recession.

The strength was broad-based across all media categories, helped by lower prices, a larger number of offerings and a better stocked position. Prime did very well in the quarter.

Electronics and General Merchandise (EGM) increased 8.9% sequentially and 36.1% from the year-ago quarter. Both growth rates were higher than in the second quarter.

Management appeared particularly optimistic about strength in Kindle, which also benefited from the price reduction announced during the quarter. The recently announced international Kindle is expected to ensure continued growth.

The strength in International was driven by units sold (up 32%), active customer accounts (up 17%) and active seller accounts (up 24%). Both Media and EGM grew double-digits on a sequential and year-over-year basis.

Gross Margin

North America generated a gross margin of 26.5%, down 97 basis points (bps) sequentially and up 99 bps year over year. The operating margin was 5.5%, up 39 bps sequentially and 166 bps year over year.

The increase was driven by higher sales of the Other product category, better inventory management, favorable vendor pricing, partially offset by lower customer prices and unfavorable mix. International a generated gross margin of 20.0%, down 96 bps sequentially and 106 bps year over year.

The decline in international was related to lower customer prices and unfavorable mix that were partially offset by better inventory management, better vendor prices and higher sales of the Other product category.

 

The pro forma gross margin on a consolidated basis was 23.4%, down 100 bps sequentially and 7 bps year over year.

Operating Performance

The operating expenses of $932 million were higher than both the previous quarter’s $838 million and the year-ago quarter’s $775 million. The operating margin was 6.3%, down 8 bps sequentially and up 100 bps year over year.

The sequential decline was attributable to the higher cost of sales (as a percentage of sales), which was almost totally offset by lower fulfillment, marketing, technology & content, G&A and other expenses (as a percentage of sales).

Amazon generated a pro forma net income of $270 million, or a 5.0% net income margin compared to a $247 million, or 5.3% in the previous quarter and $168 million or 3.9% net income margin in the same quarter last year.

The fully diluted pro forma earnings per share (EPS) was 61 cents, compared to 56 cents in the Jun quarter and 31 cents in the Sept. quarter of 2008. Our pro forma estimate in the last quarter excludes stock compensation expenses on a tax-adjusted basis.

Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management. The GAAP net income was $199 million (45 cents per share) compared to $142 million (32 cents per share) in the previous quarter and $118 million (27 cents per share) in the prior-year quarter.