16 Comments

Summary:

Amazon seems to be once again proving the naysayers wrong. Back in the dot-com boom, CEO Jeff Bezos piled on debt to build the biggest online retailer, one designed to keep customers happy. People said it would drive Amazon to an early bankruptcy, but the company […]

Amazon seems to be once again proving the naysayers wrong.

Back in the dot-com boom, CEO Jeff Bezos piled on debt to build the biggest online retailer, one designed to keep customers happy. People said it would drive Amazon to an early bankruptcy, but the company turned a profit in 2002 and has stayed in the black since. They said the company would never be more than a glorified retailer, but dozens of startups are using its Web services as a utility-like lifeline for their incubation.

When those criticisms were pushed aside, the naysayers said Amazon Prime was a brick tied to its potential profits, and that it would never drive revenue growth through customer loyalty as Bezos had promised. They also said that the company’s focus on free cash flow was a distraction against the ever shrinking operating margins that would drive Amazon back to a loss someday.

Bezos has pretty much refuted those last two points in the conference call Tuesday announcing the company’s stellar second-quarter earnings. Amazon’s revenue came in at $2.89 billion, up 35% from a year earlier. Net income ballooned to $78 million, or 19 cents a share, from $22 million, or 4 cents a share, in the same quarter a year ago. Analysts had been looking for revenue of $2.81 billion and a profit of 16 cents a share, so the numbers came in well ahead of what Wall Street had been expecting.

As for the free cash flow figure Amazon has trumpeted for so long, it nearly doubled to $700 million in the quarter, from $375 million in the second quarter of 2006. That suggests the strong rise in profit is coming from a healthy business operation, not buttressed by one-time gains or money made from interest or other investments. And it increased cash flow while pushing up operating margins, to 4% in the quarter from a rather abysmal 2.2% a year earlier.

For years, Bezos’ game plan was to focus on low prices and fast delivery, even if it drove up costs in the near term. He’d talk over and over about the importance of the customer experience, and it might have been another mantra turned cliche except for the amount of money he was willing to put behind it.

In February 2005, Bezos introduced Amazon Prime, which promised free two-day delivery (and a big discount on overnight shipments) for a $79 a year subscription. At first, Amazon’s customers seemed to be cold to the program, but over time it seems to have prompted old customers to become much more active customers – a necessary trend since Amazon’s growth in new customers was flattening out.

It’s working so well that Amazon’s North American sales are growing faster than international sales – a sort-of role reversal for most of the U.S. Internet giants. U.S. sales grew 38% to $1.6 billion in the quarter, while international sales grew 38% to $1.3 billion.

Analysts on the conference call seemed to accept this gap as evidence that Bezos has successfully reinvigorated growth at Amazon’s core market. He said the fast growth in its home market was driven by demand for lower priced products delivered quickly – a payoff to his master plan all along. Now Amazon is launching Amazon Prime abroad, starting with Japan.

Amazon’s stock, which has been volatile lately in the manner of speculative stocks, rocketed up 18% in after-hours trading from its official close Tuesday of $69.25. That leaves the stock as expensive as ever, but investors who had bought into the stock in recent months, despite its high valuation, are seeing some payoff now.

  1. “…hasn’t stayed in the black since”

    probably should read

    “…has stayed in the black since”

    Share
  2. As a buyer, I LOVE Amazon. Even more than I ever loved Ebay. I hope Amazon never goes out of business.

    • One very satisfied Amazon customer
    Share
  3. Kevin Kelleher Tuesday, July 24, 2007

    Thanks for that catch.

    Share
  4. I’ve been a pretty consisten Amazon customer for nearly ten years. I’m in the middle of my second year of Amazon Prime. While my purchases have only increased slightly, the rest of the household (one decent Amazon customer + one guy that’s only ordered from Amazon twice before we had Prime) has gone absolutely apestuff with the service. Our place gets at least four Amazon deliveries a week.

    Share
  5. [...] over at GigaOM has an excellent post title Bezos to Wall Street: I Told You So describing Amazon’s Jeff Bezo’s triumph over critiques regarding his focus on customer [...]

    Share
  6. Bezos was not looking for quick dotcom cash when he started…he was looking at dynamics most startups don’t even consider in web 2.0, a business model, customer service, …his focus and determination will make him one for the history books. In addition, the amazon web services are just icing on the cake! so, i guess that makes me an amazon fan boy.

    Share
  7. but dozens of startups are using its Web services as a
    utility-like lifeline for their incubation.

    Oh? And how much money is Amazon making from these dozens of startups for its web services? And if there is such a big market for these types of web services, how come Google is not competing head to head?

    Share
  8. Jay (living in First Life) Wednesday, July 25, 2007

    Amazon is doing well and Bezos has proved a lot of people wrong. That being said, you need to look at total Return on Invested Capital which is still pretty crappy at this point. Think about how many billions of dollars of assets have been deployed to create that profit and free cash flow?

    That being said, I’m not complaining. Amazon is great for customers!

    Share
  9. So Amazon is back to where it was in 2000? So that makes the total return over 7 years to be…um….Zero percent. Well let’s break the champagne out then.

    Share
  10. Kevin Kelleher Wednesday, July 25, 2007

    eddie, I wish I could tell you how much revenue Amazon is making off its Web services. It doesn’t break it out, and I think it should. But consider that it doesn’t cost much for Amazon to lease out its massive server power or share some of its coding. The margins from this business are quite high, lifting overall margins.

    Share

Comments have been disabled for this post