AWS move, disclosure suggest Amazon yielding more to Wall Street

January 30
12:15 AM 2015

After years of giving investors the cold shoulder, Inc (AMZN.O) is starting to warm up to Wall Street.

The No. 1 U.S. online retailer was unusually forthcoming during its fourth-quarter earnings call on Thursday, saying it will break out results this year, for the first time, for its fast-growing cloud computing unit, Amazon Web Services.

The company also said it would focus on getting more out of its assets in 2015 and emphasized that it was already starting to reap benefits from investments in steaming video and logistics infrastructure.

"The team ... is putting even more energy around making sure we get great productivity around our various fixed and variable investments," Chief Financial Officer Tom Szkutak told reporters on a conference call.

This was a shift in tone for Amazon, which typically refuses to disclose more than the most basic details, including how many members belong to its $99-a-year Prime program or if its wide-ranging investments are paying off.

Chief Executive Jeff Bezos has deflected criticism of his spending by emphasizing that he takes a much longer view than most investors. Late last year, he boasted that he spends just six hours a year on investor relations.

But Amazon shares dropped by more than 20 percent last year as investors grew weary of its spending on film and television productions, grocery delivery and consumer devices. Amazon also has fallen short of estimates in five of the last eight quarters.

The additional information shared during Amazon's fourth-quarter results as well as its emphasis on becoming more efficient signaled a new willingness by Amazon executives to listen to investors as well.

"This quarter, Amazon flexed its muscles and said this is what we can do when we focus on profits," said Rob Plaza, senior equity analyst for Key Private Bank. "If they could deliver that upper teens, low 20s revenue growth and be able to deliver profits on top of that, the stock is going to respond."

The change is unlikely to be dramatic. When asked whether this quarter marked a permanent shift in Amazon's relationship with Wall Street, Plaza laughed: "I wouldn't be chasing the stock here based on that."

Still, the shift is a good sign for investors, who have been clamoring for Amazon to disclose more about its fastest-growing and likely most profitable division that some analysts say accounts for 4 percent of total sales.

The change seemed unlikely until AWS made up 10 percent of Amazon's net sales, the threshold at which U.S. securities regulators require disclosure.

Szkutak also added that a large portion of Amazon's capital expenditure will go toward AWS, which has stepped up its efforts to win over lucrative contracts with large, corporate clients.

"You should expect that we'll be spending more in terms of CapEx to support our web services business, which is growing very fast," he said on a separate call with analysts. "You should expect us to add fulfillment capacity."

In a statement, Bezos also revealed that Prime memberships grew 53 percent worldwide in 2014, with international markets outpacing U.S. growth - the first time the company shared such figures. Amazon spent $1.3 billion on its video operation and billions on Prime shipping, Bezos said.

Customers who tested Prime for streaming video were more likely to subscribe and stay longer than those who joined through other channels, Szkutak said.

Amazon's spending on packing and shipping orders rose just 17.3 percent, nearly half the increase in the 2013 fourth quarter. Having more warehouses has helped lower transportation costs and Amazon is relying more on third-party sellers, which Plaza said generate three times the margin of direct Amazon sales.

There was little discussion of consumer devices, like the Fire smartphone Amazon debuted last year to lackluster reviews. In the fourth quarter, Amazon worked through some of the $80 million in excess phone inventory it had at the end of September, Szkutak said.

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