Amazon’s overseas weakness overshadows strength at home
Amazon’s overseas weakness overshadows strength at home
Amazon and other multinational corporations are being pressured by a declining European economy that is sapping consumer spending across the region.
While North American sales jumped 30 percent in the second quarter, its international segment did not earn a profit and revenue rose 13 percent.
“International was far weaker than expected and that plays into the guidance. We’re seeing weakness on the international side that the domestic business isn’t able to make up,” said Scott Tilghman, an analyst with B. Riley & Co.
“The European consumer has been weak. It’s a tremendous opportunity for Amazon. International margins have been constrained. If they can get to 5 percent profit margins or more, that’s tremendous operating leverage. But you need the macro environment to be better.”
After the bell on Thursday, the company reported a second-quarter net loss of $7 million or 2 cents a share, compared to a profit of $7 million or a penny a share a year earlier. Revenue in the latest quarter was $15.7 billion.
The largest Internet retailer had been expected to earn 5 cents a share on $15.73 billion in revenue in the latest quarter, according to Thomson Reuters I/B/E/S.
Amazon also issued a cautious third-quarter outlook.
It forecast revenue of $15.45 billion to $17.15 billion and operating results ranging from a loss of $100 million to a profit of $275 million.
Wall Street was looking for third quarter revenue of $17 billion and operating profit of $390 million.
Amazon is trying to turn itself from an online retailer into a broader technology company offering consumer gadgets like tablets and cloud computing services to corporations and governments. It is doing this while expanding in competitive overseas markets such as China.
It is spending billions of dollars on this expansion, which has taken a toll on its earnings. However, investors have so far trusted that Chief Executive and Founder Jeff Bezos can pull it off and produce big profits in the future. That’s help pushed Amazon shares to new records.
Amazon’s International business broke even in the second quarter, leaving it nursing a $16 million operating loss in the first half of this year.
Revenue generated by the company’s International media business, which includes books, music and movies, shrank 1 percent in the second quarter, compared to a year earlier.
Overseas, Amazon is in the early stages of a transition from physical media products like books and CDs to digital media such as e-books and MP3s, Chief Financial Officer Tom Szkutak said.
This shift requires lots of up-front investment, developing and marketing gadgets like the Kindle Fire tablet for new markets and buying digital content to sell through such devices. The company is also investing heavily in fulfillment centers in relatively new countries like China and Spain.
Szkutak said the Internet retailer is spending heavily on digital video content — in Europe as well as the US — ahead of the holidays. This spending is partly responsible for a cautious third-quarter forecast, the executive added, during a conference call with reporters.
Amazon’s domestic business performed much better in the second quarter. North American operating profit was $409 million, up from $344 million a year earlier.
The company’s cloud business, Amazon Web Services, grew strongly. Amazon includes results from this unit in its “Other” segment for reporting purposes and revenue from this area jumped 61 percent to $892 million in the second quarter.
“AWS continues to power through, driven by broader adoption from larger enterprises,” said Ben Schachter, an analyst at Macquarie. “And that certainly helps the gross margin.”
Amazon does not disclose AWS profits, but Wall Street reckons the business has higher profit margins than the company’s main retail business. So as AWS grows, Amazon’s margins expand.
Amazon’s gross profit margin — a closely watched measure of earnings that excludes several expenses — was 28.6 percent in the second quarter, up from 26.1 percent a year ago, according to Tilghman.
“That’s very high — higher than anybody was looking for,” the analyst added.
AWS growth helped, but also more sales of higher-margin digital products and the expansion of the company’s online marketplace for third-party merchants, Tilghman explained.
Barclays chief Staley survives whistleblowing inquiry with fines
- Case marks first test of Britain's "senior managers regime"
- Decision not to dismiss Staley comes as relief for shareholders
Barclays said Jes Staley will be fined by British regulators for attempting to unmask a whistleblower, but will be able to keep his job as the bank’s chief executive.
The country’s banking watchdogs concluded Staley’s attempt to find out who wrote a letter raising “concerns of a personal nature” about an unnamed senior employee represented a breach of individual conduct, Barclays said on Friday.
Staley’s case is the first big test of Britain’s “senior managers regime” (SMR), aimed at making top banking officials personally accountable for their actions after few were punished for their roles in bank collapses during the financial crisis.
If Staley accepts the findings of the regulators, it would be the first time that a sitting chief executive of a major bank in Britain has been fined by its regulators. A bank spokesman said the size of the fine had yet to be determined.
Barclays said the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) were “not alleging that he (Staley) acted with a lack of integrity or that he lacks fitness and propriety to continue to perform his role as Group Chief Executive Officer.”
News of the FCA and PRA fines follows a more than year-long probe in Britain that had led to speculation among some investors and bank insiders that Staley could have been forced to step down if deemed unfit to continue by those authorities.
Barclays also said that the FCA and PRA will not take enforcement action against the bank, while authorities in the United States are still investigating the case.
“Staley will live on to fight another day – which we welcome as a positive development for the bank and a relief for shareholders,” John Cronin at Irish broker Goodbody said.
“He’s been delivering on the strategy far more effectively than his predecessor had and therefore absent any sort of genuine malpractice we’re pretty keen for him to crack on,” one of the bank’s top 40 investors said.
The British bank, which in April last year said it had reprimanded Staley and would cut his bonus for his attempts to identify the whistleblower, will be required to report to the FCA and PRA on aspects of their whistleblowing programs.
The watchdogs could have banned Staley and opting for a fine could dent the fledgling SMR’s credibility.
“The magnitude of banning the sitting CEO of such a systemically important institution made outcomes other than a fine unlikely, but the case does set an interesting precedent,” said Nicholas Queree, an associate at law firm Peters & Peters.
Staley received the draft warning notice last week and was given 28 days to accept the findings or appeal. If he agrees to pay the two fines he would get a 30 percent discount.
The fines have been set according to a formula that considers the type of offense, the offender’s position in the company, any financial hardship, any previous cases, and whether there was any monetary benefit from the offense.
“We ... will announce the outcome once this issue has reached a conclusion,” the FCA and PRA said in a statement.
Legal experts question whether a light sanction for Staley could send a signal to other potential bank whistleblowers that they risk unmasking if they speak out.
Barclays said it will recommend Staley’s re-election as a director at its board meeting on May 1. At the last annual meeting he faced resignation calls, but was given a public endorsement from Chairman John McFarlane.
Staley’s pay package was £3.88 million ($5.45 million) in 2017, 8.5 percent less than the previous year.