Amazon.com (AMZN) Earnings Preview: Q1 Results Likely To Show Better US Profit Margins And Customer Rush To Get Prime Service Ahead Of Price Hike

Fresh on the heels of a groundbreaking deal with HBO to bring beloved dramas like "The Sopranos" and "The Wire" to its streaming video users later this year, Amazon.com (NASDAQ:AMZN) is expected to report higher first-quarter earnings on Thursday, thanks to falling shipping expenses, a steady expansion to higher-margin business like entertainment and Web services, and a rush of Prime memberships before a big price hike.

Amazon’s Paid Prime memberships that give customers perks like free two-day shipping appear to be accelerating, and retail profit margins are rising after the company streamlined shipping from third-party vendors. At the same time, its Web Services growth, expanding video options and device debuts highlight its broadening ambitions, analysts at Macquarie Capital told clients earlier this year.

“We believe that virtually all of Amazon’s future growth initiatives can come from structurally higher-margin businesses [rather] than ultra-low-cost retailing,” they concluded.

Amazon’s first-quarter margins are improving from increased shipping leverage, Amazon Web Services, digital media and advertising, according to Macquarie’s analysts.

The Internet retailer and stock market favorite is expected to report net income of $111.95 million, or 23 cents a share, 37 percent higher than a year ago, according to analysts polled by Thomson Reuters. The analysts expect the firm’s revenue to rise 21 percent, to $19.4 billion. Excluding one-time items, analysts expect earnings per share of 22 cents, compared to 18 cents in the first quarter of last year.

The company’s continuing investment in its North American fulfillment centers, the giant warehouses from where it ships its goods, has helped lift its profit margins over the last five quarters, analysts said. That investment has put the merchandise closer to customers and cut shipping costs for Amazon.

RBC Capital analysts expect that North American investment cycle is ending but will probably continue in places like China, India, Italy, Spain and the U.K. where Amazon’s margins have not grown.

Amazon Web Services, which offers businesses IT options to power Web and mobile applications, process and store data online in the cloud, as well as other services, grew 52 percent in 2013’s fourth quarter, and Goldman Sachs analysts said this week they expect faster growth in the first quarter.

Amazon increased Prime membership fees to $99 a year, from $79, on April 17. That likely prompted some customers to sign up in the first quarter, before the hike went into effect. Going forward that hike will provide more revenue, but observers debate whether it will add to the bottom line, as Amazon likely operated Prime for years at a loss.

Online shopping increased 12 percent in the January to March period compared to the same period last year, according to RBC Capital. The firm’s analysts estimate that Amazon has 20 percent market share in U.S. online retailing, and they predict that percentage will grow. Though desktop page views at Amazon.com declined by about 9 percent in the first quarter compared to a year earlier, mobile page views increased by more than 50 percent, RBC Capital said. ComScore data used by Goldman Sachs estimated that worldwide mobile unique views grew 35 percent in the first quarter.

Kindle Fire and eReader devices alone likely contributed about $700 million to first-quarter revenue, and the devices are likely driving what Amazon said earlier this month is tripled revenue on digital media content compared to last year, Goldman Sachs analysts say.

RBC Capital analysts Mark Mahaney and Rohit Kulkarni said Amazon’s key drivers of revenue growth and acceleration this quarter are margin expansion, a strong video game cycle, Kindle eBook development and strong Kindle product refreshes, macroeconomic recovery in the European market, momentum in Amazon’s consumer staples and apparel segments, strong Web services traction and leverage in fulfillment expenses.

Amazon is “at a fundamental inflection point,” they wrote.

The latest marker of that inflection point appeared on Wednesday, just a day before the company posts results. Amazon announced a content-licensing agreement with HBO to make Prime Instant Video the exclusive online-only subscription for about 1,700 titles of HBO programming, including the shows "The Sopranos," "Six Feet Under" and early seasons of "True Blood."

Amazon said early seasons of other shows, including "Girls" and "The Newsroom," will roll out over the coming years, most likely three years after airing on HBO.

Though a growing number of states are enforcing new online sales taxes that may drive customers to brick-and-mortar stores over Amazon, many analysts believe the company will continue growing its customer base as online retail continues to grow.