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Amazon posts record $2bn profit as Prime membership soars

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02 February 2018

Amazon.com Inc on Thursday reported a profit near $2 billion, the largest in its history, as the online retailer drew millions of new customers to its Prime fast-shipping club for the holiday season and as changes to US tax law added to its bottom line, while demand for its cloud services also grew.

Amazon shares rose more than 6 per cent in extended trading on Thursday, after previously closing down 4 per cent on the Nasdaq.

Net sales in North America, its biggest market, jumped 42.2 per cent to $37.30 billion in the last quarter.

The company's fast-shipping and video-streaming service, Amazon Prime, continued to add members at a brisk pace during the holiday season. More than four million people started free Prime trials or opted for paid memberships in one week alone, the company had said in December.

Last month, the company raised the monthly fee for US Prime membership by $2, its first increase in almost four years.

Amazon, which shipped over five billion items worldwide through its subscription-based Prime service in 2017, said its net sales rose 38.2 per cent to $60.45 billion in the reported quarter from $43.74 billion a year earlier.

Analysts on average were expecting $59.83 billion, according to Thomson Reuters I/B/E/S.

Revenue from Amazon Web Services, the company's fast-growing cloud services business, surged 44.6 per cent to $5.11 billion, beating analysts' estimate of $5 billion.

Net income rose to $1.86 billion, or $3.75 per share, in the quarter ended 31 December from $749 million, or $1.54 per share a year earlier.

The results include a tax benefit of about $789 million related to the new US tax law.

Excluding one-time items, the company earned $2.16 per share, while analysts were expecting a profit of $1.85 per share, according to Thomson Reuters I/B/E/S.

Amazon's total operating expenses surged 37.3 per cent to $58.33 billion as the company invests heavily into expanding its Prime service, creating original video content and building its warehouse and delivery infrastructure.

Seattle-based Amazon is using fast shipping, television shows exclusive to its website and forays into new technology, such as its voice-controlled Alexa devices, to attract high-spending Prime members. Amazon said price cuts at Whole Foods Market, which it acquired for $13.7 billion last year, are helping it win grocery sales, too.

As expected, the period running from before the U.S. Thanksgiving holiday through New Years was Amazon's biggest-ever by revenue. Sales rose 38 per cent to $60.5 billion in the quarter, beating estimates.

The company's fast delivery, like its two-hour Prime Now service, has helped win over holiday shoppers eager to avoid the crowds of big box retailers. Prime saw more than 4 million sign-ups in one week alone last quarter, and revenue from subscription fees grew 49 per cent to $3.2 billion, Amazon said.

That figure is expected to rise this quarter in part because the company recently raised the fee for month-to-month Prime plans, affecting some 30 percent of subscribers. Some 60 million, or close to half of all US households, are estimated to have Prime subscriptions.

Brian Olsavsky, Amazon's chief financial officer, said on a call with analysts that advertising was "a key contributor" to the company's growing profit margin. Alphabet Inc's Google on Thursday reported ad revenue of $27.2 billion by comparison.

Perhaps the surprise star of the past quarter was Amazon's voice aide Alexa, embedded in the company's Echo speakers and Fire TV players, as well as some cars and house gadgets. Millions of Amazon customers ordered goods by voice with Alexa in the past year, said Olsavsky on a separate call with reporters.

"Our 2017 projections for Alexa were very optimistic, and we far exceeded them," added Jeff Bezos, Amazon's founder and chief executive, in a statement. "We don't see positive surprises of this magnitude very often expect us to double down."

Amazon's stock has outperformed the S&P 500, rising almost 50 per cent since the start of the fourth quarter to Thursday's close, compared with the S&P's 12 per cent rise.

Its shares trade at a premium to those of many peers. The stock's price-to-earnings ratio is nearly 12 times that of cloud computing rival Microsoft Corp, for instance.

Amazon Web Services (AWS), which is competing with Microsoft to handle data and computing for large enterprises, saw its profit margin expand from the third quarter.

Amazon said it expects operating profit in the current quarter of between $300 million and $1 billion. Analysts were expecting $1.5 billion, according to analytics firm FactSet.

The company has become notorious for running on a low profit margin. Yet its big bets on new services and entry into new industries have reaped shareholders rewards over the past decade, including its founder Bezos, now the richest man in the world.

Amazon continues to spend on a wide array of areas. It is expanding its retail footprint outside the United States, particularly in India, and almost doubled its international operating loss to $919 million in the fourth quarter. Amazon's global headcount is up 66 per cent from a year ago at 566,000 full-time and part-time employees, thanks to a hiring spree and an influx of workers from Whole Foods Market.

And earlier this week, it announced a partnership with JPMorgan Chase & Co and Berkshire Hathaway Inc to determine how to cut health costs for hundreds of thousands of their employees.

The company said it plans to spend more on video content this year as well, with a prequel television series to "The Lord of the Rings" in the works. Analysts estimate Amazon spent $4.5 billion or more in 2017.





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