Saturday, January 29, 2011

Amazon's 4th Qtr Results: Reactions, Kindle Profitability

The Wall Street Journal Blog's Dan Gallagher, after Amazon's 4th Qtr report Thursday, writes that while the Amazon Kindle is "far and away the most popular of the dedicated e-reader devices on the market"..."it remains unclear just how much profit – if any – the company is able to realize from the device and its associated e-books business."

It's an interesting angle because most of the stories are about how Amazon sold 115 e-books (not counting free ones) for every 100 paperbacks sold, during the first quarter of this year so far and that includes paperback books for which there is no Kindle edition.  This would include a spurt of e-book buying after Kindles were opened during the holidays, but it's not unlikely that the new Kindle owners would continue to buy e-books more often than they'd bought printed books, as that is a common report.

Retail Gazette in the U.K. pointed out that Jeff Bezos remarked:
' Last July we announced that Kindle books had passed hardcovers and predicted that Kindle would surpass paperbacks in the second quarter of this year, so this milestone has come even sooner than we expected - and it’s on top of continued growth in paperback sales. '
  I won't quote all the details of the dollar stats, as you can just read them in any of the financial articles, including the ones linked here, but the WSJ's Gallagher brings up an interesting point, re profitability on the Kindle.

  Although the company reiterated that it has sold more units of the Kindle 3 than the final book in the Harry Potter series, making it Amazon's top-selling product ever, Gallagher continues:
'...the revenue boost may not be flowing to Amazon’s bottom line; in fact, it may even be weighing it down.

  For one, it looks likely that Amazon makes little to no money on the device itself.   A study by market-research firm iSuppli last year estimated the total cost of materials for the 3G Kindle at $155.56 – about $33 less than the $189 selling price for the device.

 Since iSuppli’s estimates do not include the cost of software, licensing, royalties, manufacturing expenses (Amazon outsources production of the Kindle) and a cut for the wireless carriers, analysts suspect Amazon likely sells the Kindle at a slight loss. '
  When asked about this during a conference call with analysts Thursday, Amazon's financial officer, Tom Szkutak, "refused" to give specifics about the Kindle's profitability.

  Many have brought up the razor-razorblade model for the Kindle and Amazon's e-books.  But Ben Schachter of Macquarie Research feels that "lack of profits from the device, along with Amazon’s move to sell more lower-margin electronics and general merchandise, is keeping pressure on the bottom line" and therefore there is frustration that "margins are not improving."

  " 'That's why people are frustrated that margins are not improving,' Schachter says.  'Any margin improvement from e-books is being hurt by spending, the [cost of] Kindle hardware and the shift into [electronics and general merchandise] categories.  Amazon is willing to push margin on that to make money over the long term.' "

Even though Net Sales increased 36% to $12.95 billion in the 4th Qtr and Net Income increased 8% to $16 million, there was "unfavorable impact" from year-over-year changes in foreign exchange rates throughout the quarter, and shares sank 9% after hours Thursday.

  It's all about high expectations -- and even then Amazon's net income beat expectations, hitting 91 cents per share while analysts had expected 88 cents per share, per Factset.  However, they'd "expected" more than 36% net sales and Amazon also "warned that operating profit could decline as much as 34 percent [AB here: or as little as 2 percent] compared with the first quarter of 2010" as they invest long-term in building the company.

Other highlights:
  . It was Amazon's first $10 billion quarter.
  . The U.S. Kindle store now contains 810,000 books, including New Releases and 107 of the 112 books on the New York Times best-seller list.  About two-thirds of the books cost $9.99 or less, the company said.
  (Barnes & Noble, as well as Sony, count the ~1.5 million free public domain Google books in their totals.)

In its SEC 10-K filing dated January 28, 2011, Amazon has to set out all the possibilities, especially the negative ones, and it's an interesting read.  Of note for us customers, writes:

' The company plans to rapidly and significantly expand global operations, including increasing product and service offerings and scaling infrastructure to support retail and services businesses.  This expansion increases the complexity of its business and places significant strain on management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions.  In assessing the risks of its growth, the company said "We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results," the filing said. '
  That's par for the course with SEC 10-K filings.
  The PR release says it, of course, more positively: "Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce and the various factors detailed..."

  The SEC 10-K filing continues on in the vein quoted by Authorlink and they end the article with, "Despite these risks, the company expects significant growth next year."

Kindle 3's   (UK: Kindle 3's),   DX Graphite

Check often: Temporarily-free late-listed non-classics or recently published ones
  Guide to finding Free Kindle books and Sources.  Top 100 free bestsellers.
UK-Only: recently published non-classics, bestsellers, or highest-rated ones
    Also, UK customers should see the UK store's Top 100 free bestsellers. Below are ways to Share this post if you'd like others to see it.
-- The Send to Kindle button works well only on Firefox currently.

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  1. I'm no big business finance wizard, however the loss on the Kindle sales must certainly be made up in at least these forms: Intense pressure on Barnes & Noble despite the ePub differences and the benefits of market dominance.


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