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Amazon Reports Another Loss Despite Strong Sales Growth--3rd Update

DOW JONES & COMPANY, INC. 7:52 PM ET 07/24/14

Symbol Last Price Change
AMZN 358.61up 0 (0%)
MSFT 44.4up 0 (0%)
QUOTES AS OF 04:00:00 PM ET 07/24/2014

Amazon.com Inc.'s (AMZN) profit allergy finally may be making investors sneeze.

The Web retailer on Thursday reported a wider-than-expected loss of $126 million for the second quarter despite a 23% jump in revenue. It also indicated there is more red ink ahead, projecting an operating loss in the current period of as much as $810 million.

Amazon's (AMZN) shares fell as much as 10.2% in late trading to $322 on top of an about 10% drop year-to-date through the close. Shares have tumbled a similar amount following each of its last two quarterly reports.

The losses reflect Amazon's(AMZN) heavy investments in new businesses and services that some investors worry are stretching the Seattle company too thin. This year it has released an array of new offerings including a hand-held grocery-ordering device, unlimited e-book rental and streaming services, and its first set-top box and smartphone.

At the same time, Amazon(AMZN) signaled that one of its most promising businesses, its cloud-computing division that provides outsource computing storage and support, suffered a slowdown in growth that affected results in a "meaningful way."

That unit is in a price war with Google Inc. and Microsoft Corp.(MSFT)

Finance chief Tom Szkutak insisted the company remains focused on investing in new businesses and products rather than worrying about earnings. "We're not trying to optimize for short-term profit," he said on a conference call Thursday.

Amazon's (AMZN) sales rose to $19.34 billion in the quarter, but the company spent nearly as much on the period's expenses. Operating margin, a closely watched metric, was a negative 0.1%, compared with 0.5% of sales a year earlier and 0.7% in the first quarter.

Amazon (AMZN) has hinted at a growing resolve to boost margins over time. The new Fire smartphone, which arrives in stores Friday, surprised some analysts with a price about the same as high-end models from Apple Inc. and Samsung Electronics Co. And while Amazon(AMZN) undercut rivals with its Kindle Fire tablet computer, its set-top box costs as much as twice the price of some rival devices.

The company also has been in a fight with publisher Hachette Book Group over e-book pricing, leading it to halt preorders of some titles and delay delivery of others. It concluded a spat with Warner Bros. over DVD pricing that at one point had Amazon(AMZN) preventing preorders of some popular movie discs.

Mr. Szkutak said pricing cuts to cloud-computing services in its Amazon Web Services division were to blame for a rare slowdown in revenue for the unit compared with its first quarter.

Still, Chief Executive Jeff Bezos has said the AWS division could one day overtake its core retail division by revenue.

Amazon (AMZN) doesn't break out sales figures for AWS, but said growth in "other" revenue slowed to 38% from a year ago, compared with growth of 60% in the first quarter. The AWS unit's sales slipped to $1.17 billion from $1.2 billion three months earlier. The company said it has cut service prices by between 28% and 51% for various AWS services.

Mr. Szkutak said AWS remains a solid business with usage up 90% year-over-year. "We put in some price reductions that were very substantial," he said "It's doing great and we are very pleased to have the opportunity to invest in [ AWS]."

Meanwhile, Amazon(AMZN) continues to widen its warehouse footprint as part of its quest for speedier delivery. New facilities are under construction or recently completed in Baltimore, outside New York City, Florida, Wisconsin and elsewhere. The company has stopped tiptoeing around state sales tax regulations, instead reaching deals for new massive warehouses.

For the third quarter, Amazon(AMZN) is forecasting an operating loss between $410 million and $810 million, compared with $25 million a year earlier. The guidance includes about $410 million for stock-based compensation and amortization of intangible assets, Amazon(AMZN) said.

The company also expects third-quarter revenue between $19.7 billion and $21.5 billion, which is up to 26% higher than a year ago and straddles the average analyst estimate of $20.83 billion.

On Friday, Amazon(AMZN) will officially release its new Fire phone, in a continuing bid to encourage customers to buy more from its namesake site. Customers who use the device, which comes with a year of Prime unlimited shipping free, will be feeding new, valuable data back to Amazon(AMZN) that can help the company tailor merchandise recommendations to all of its users.

Reviewers of the phone haven't been especially kind, knocking the handset for a lineup of features that don't seem to elevate it to a must-buy. But because the Fire phone is designed to make shopping on Amazon.com(AMZN) even easier, it doesn't have to be a home run for it to be a winner.

Write to Greg Bensinger at [e-mail]

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07-24-141952ET
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