Amazon.com’s (AMZN) first quarter earnings beat the Zacks Consensus Estimate by 4 cents, or 6.45%. Revenue beat the consensus by 3.8%.

Revenue

Revenue for the period was $7.1 billion, down 25.1% sequentially (due to seasonality), but up 45.9% year over year. Revenue exceeded the high end of management’s guidance range of $6.45-7 billion, or a year-over-year increase of 32% to 43%.

Approximately 53% of sales were generated in North America, which declined 23.7% sequentially and increased 46.6% year over year. The balance came from the International segment, which declined 26.6% sequentially and increased 45.0% year over year.

The revenue growth was attributable to a 40% growth in units and an increase in active customer accounts to 114 million, which included Chinese customers for the first time. Amazon also benefited from higher third-party sales, which are a percentage of revenue earned by its partners on goods sold on its online marketplaces. Active seller accounts were up 22% to 2 billion in the last quarter, with seller units at 31% of total units sold on its properties.
 
Segment Details

The North America Media business declined 23.9% sequentially but grew 22.4% from the year-ago quarter. The significant increase from the year-ago quarter was attributable to much higher volumes. The business has weathered the recession extremely well, consistently posting year-over-year gains.

The Electronics and General Merchandise (EGM) business in North America declined 24.0% sequentially and grew 72.7% from the year-ago quarter. This was the strongest year-over-year growth in the last two years. Results were driven by better pricing from suppliers, as well as a better selection and partially offset by more competitive prices offered to customers and free shipping offers.

Although management did not provide additional color on Kindle sales, we expect that there was a sequential decline based on seasonality. However, the e-book reader remains the company’s best selling product, with the total selection currently at over 500,000 titles. The marketing effort has also been stepped up and for the first time, Kindle is selling at Target Corp’s (TGT) brick-and-mortar outlets. Management stated that Prime continued to do well in the last quarter.

The International segment was down 26.6% sequentially, but up 45.0% year over year. The media business (26% of total revenue) declined 29.0% sequentially and grew 29.3% year over year. EGM, which was around 21% of total revenue was down 23.5% sequentially and up 70.4% year over year. The addition of new product categories over the past year, better selection within categories, competitive prices and stronger sales from Prime contributed to the increase.

Operating Results

The gross margin expanded 210 bps sequentially to 22.9%, although it was down 62 bps from the year-ago quarter. Sequential variations in gross margins are largely mix-related, with the decline from the year-ago quarter attributable to competitive pricing.

The operating expenses of $1.2 billion were down 17.6% sequentially, although they were up 36.7% from the year-ago quarter. As a result, the operating margin expanded just 52 bps sequentially and 53 bps from the year-ago quarter.

The North America and International segments generated operating margins of 7.2% and 7.0%, respectively, with North America increasing both sequentially and year over year, and International declining both sequentially and year over year. The decline in International was largely currency-related.

Operating profit dollars were down 17.2% sequentially and up 61.5% year over year. The year-over-year increase in operating profit dollars was driven by both segments, with the North America segment increasing 82.0% and the International segment increasing 36.0%.

Amazon generated first quarter net income of $301 million, or a 4.2% net income margin, compared to $386 million, or 4.1% in the previous quarter and $251 million, or 3.7% net income margin in the same quarter last year. There were no one-time items in the last quarter.

Accordingly, the GAAP EPS came in at $0.66 compared to $0.85 in the Dec 2009 quarter and $0.41 in the Mar quarter of 2009.

Balance Sheet and Cash Flow

Amazon ended with a cash and investments balance of $5.06 billion, a decrease of $1.3 billion from the end of the previous quarter. The company used $1.10 billion of cash in operations, mainly due to a $1.9 billion reduction in payables. Amazon also used $140 million in fixed assets (including internal-use software and website development costs). Including long-term liabilities, the debt-cap ratio was a mere 18.0%.

Guidance

Management provided guidance for the second quarter of 2010. Accordingly, revenue is expected to come in at around $6.1-6.7 billion (down 6-14% sequentially, or up 31-44% year over year). Operating income (including stock based compensation of around $130 million) is expected to grow 39-102% from the second quarter of 2009, coming in at approximately $220-320 million.
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