Amazon Beats Estimates as Digital Content Starts Paying Off

SAN FRANCISCO (Bloomberg News) -, the world’s largest online retailer, reported operating profit that beat analysts’ estimates as investments in digital content and warehouses attracted more shoppers.

First-quarter operating income was $181 million, the Seattle-based company said in a statement Thursday. Analysts on average had projected $96.8 million, according to data compiled by Bloomberg. Sales rose 22 percent to $16.1 billion, in line with analysts’ predictions.

Margins are holding up even as Chief Executive Officer Jeff Bezos invests in expansion. While new warehouses and digital content are costly, they’re also attracting new customers and outside sellers who, in turn, generate extra income. That’s helping Amazon’s profitability, according to Daniel Kurnos, an analyst at New York-based Benchmark Co.

“The improving margin story appears uninterrupted from what we saw in the fourth quarter,” Kurnos said in an interview.

Bezos added 20 shipment hubs last year to attract customers by offering faster delivery times with a massive selection of products that’s difficult for retail stores to match. The initiative is also attracting new merchants willing to sell their items through Amazon’s storefront and use the e-commerce company to complete orders.

Shares rose as much as 5.9 percent in extended trading. Amazon had advanced 2.2 percent to $274.70 at the close in New York, leaving the stock up 9.5 percent this year.

Gross margin was 26.6 percent in the first quarter, compared with 24 percent in the same period a year earlier, data compiled by Bloomberg show.

Amazon sells Kindle Fire tablets at near cost, seeking to profit from sales of virtual books, music and other content. Electronic book sales increased 70 percent in 2012 from the previous year, Chief Financial Officer Thomas Szkutak said in January.

Third-party sales and online services will continue to boost profit, since “once those things become drivers of gross margin expansion, they hold,” said Mark Mahaney, an analyst at RBC Capital Markets in San Francisco who rates the stock outperform.

Operating margin in North America widened to 4.9 percent from 4.7 percent the year prior. Investors use that number to predict the trajectory of Amazon’s overall profit, because it excludes a negative impact from lower-margin emerging markets.

Net income fell 37 percent to $82 million, or 18 cents a share, from $130 million, or 28 cents, a year earlier.