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Amazon Sales Up in Second Quarter But Investments Lead to Net Loss

Amazon grew sales 23% to $19.34 billion in the second quarter of 2014, or 22% excluding foreign exchange. It experienced a net loss of $126 million, compared with net loss of $7 million in second quarter 2013. The company warned increased investments would lead to more operating losses in the third quarter.

Metrics of Interest to Sellers
Amazon ended the second quarter with 250 million active customer accounts, up 2.5% from the end of the first quarter. Worldwide paid unit growth was up 23%.

Seller units as a percentage of total paid units was 41% compared to 40% in the previous quarter, and it ended the quarter with had over 2 million sellers.

Amazon CEO Jeff Bezos said in a statement the company had recently introduced Sunday delivery coverage to 25% of the U.S. population and launched European cross-border Two-Day Delivery for Prime.

Amazon CFO Tom Szkutak fielded questions in a post-earnings call with Wall Street analysts on Thursday. He said inventory increased 23% to 6.64 billion as it expanded selection, improved in-stock levels, and introduced new product categories.

When asked about third-party sales, Szkutak said the company experienced very strong third-party growth as a result of a number of factors. “Certainly FBA (Fulfillment By Amazon) is helping third-party growth,” he said. He also said that its Fulfillment By Amazon service “is doing great” and continues to increase as a percentage of total third-party units.

An analyst asked whether Amazon was still relatively agnostic when it came to first-party versus third-party sales. Szkutak said the margins approximate each other. “Obviously there are some differences. Some of the third-party will be used products, so you shouldn’t assume that a used product necessarily has the same contribution profit per unit as a new unit.”

“Prime subscribers are growing very nicely year over year,” Szkutak said. Amazon raised the annual Prime fees from $79 to $99 in March. Yet Amazon added more Prime subscribers in the second quarter of 2014 than it had in the second quarter of 2013 (net).

Amazon Surprisingly Forthcoming on Q3 Expenses
Szkutak was surprisingly forthcoming about factors impacting its guidance for the third-quarter. Amazon stated “operating loss is expected to be between $810 million and $410 million, compared to $25 million in third quarter 2013.”

When asked about what factors were contributing to the losses besides the price decrease in AWS (Amazon’s cloud service for third-party developers), Szkutak named a number of factors, including the fact that the third quarter was when Amazon gets ready for the seasonal fourth quarter.

Investments in fulfillment is also a factor. “We announced we’re adding 6 net new Fulfillment Centers and we also announced that we’ll have 15 or more Sortation Centers. The Sortation Centers help us get closer to customers so we can have faster delivery speed as well as delivery on Sundays, which is a big deal for us in the U.S.”

And, he said Amazon is “ramping up the spend” on video content from Q2 to Q3 significantly. Amazon will be in heavy production for its original content, including a number of pilot shows. That original content – a portion of total content – will be over $100 million in Q3, and is taken as an expense, not capitalized.

He also talked about the new devices Amazon has introduced over the last couple of quarters, as well as geographic expansion, including in China, India, Italy, Spain, and others.

“We’re encouraged by the sheer magnitude of opportunities we have,” Szkutak said, “and we’re investing in those opportunities.”

In answering a question about Amazon’s investment in video, for example, Szkutak said Amazon sees an impact on the number of Prime customers that are subscribing. There is some short-term impact but also long-term impact as Amazon retains those Prime members, who start to do more cross shopping over time.

Interestingly one factor that impacted international growth was an increase in a tax in Japan – the Japanese consumption tax rose on April 1st from 5% to 8%.

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Ina Steiner
Ina Steiner
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com. See disclosure at EcommerceBytes.com/disclosure/.