By Yaser Anwar, CSC of Equity Investment Ideas

• Amazon reported better than expected results for the first quarter. Revenue of $3.02 billion, up 32% YoY, was ahead of guidance and Street estimates of $2.94-.99 billion.
• The Qs growth was affected by: a) FX benefits approximately 300 bps, b) media sales strength, c) higher gross margins (23.8%) and d) lower taxes (27% tax rate vs. 35+ last year). The growth rate for international media was up 800 bps leading to positive margins and Shipping costs as a % of revenue was steady at 2.9%.
• Over the past two years, or about 1.5, the Street had been bearish on AMZN due to their aggressive spending and discounting, which resulted in lower gross margins. However, these results display they were necessary to drive growth, and both revenue and margin upside in the quarter.
• Longer term, investors should expect AMZNs initiatives to result in margin expansion, as it leverages its leading brand name and position as a leading Internet retailer on a global basis.
• EBITDA came in at $241 million, 51% YoY, vs. Street estimates of $210-20 million. Operating & GAAP EPS was $0.30 and $0.25 vs. Street expectations of $0.22 and $0.15 consensus, respectively.
• Management announced a new share buy-back program of $500 million, extending to 2009. First Q cash balance was $1.42 billion. TTM FCF came in $521 million, up 4% YoY, vs. estimates of $485 million.
• Total Media revenue came in at $1.99 billion, up 26% YoY. US Media were 50% of total Media vs. 52% in 06. Total Electronics revenue came in $947 million, up 48% YoY. Non-retail categories saw revenue jump to $78 million, up 26%. The Street agrees with the guidance that profit estimates will move higher by 18%.
• Mgmt continues to invest in long-term growth opportunities, such as Amazon Prime, seller platforms,Web services, and search technology, should provide AMZN with new sources of revenue over the next few years. Longer term, we expect AMZNs initiatives to result in margin expansion, as it leverages its leading brand name and position as a leading Internet retailer.

2007 Catalysts

Amazon expects to benefit from:

• a) a solid product cycle with the release of Harry Potter VII
• b) solid video game and home video cycle that could benefit sales in 2nd half of 07
• c) upgrades to AMZN Autos & Toy stores
• d) addition of video/digital offerings from Unbox,
• e) release of 10 franchise films during the summer of 07 and
• f) Amazon Prime, is an example of mgmts belief that by investing for the long-term should provide AMZN with new sources of revenue over the coming years.
• Hence, these catalysts should help AMZN expand profits further in 07.

2007 Guidance

• Mgmt expects revenues between $13.4-$14 billion (past $13-$13.7 bill), operating income in the range of $463-$593 million (past $355-$505 million), inclusive of amortization of $170 million, for FY 07.
• For Q2 net revenue guidance of $2.7-$2.85 billion alongside Operating income of $65-$105 million.

Important tid-bits from the conference call — Excerpted from Seeking Alpha .

Justin Post Merrill Lynch

• If you take the midpoint of your range of GAAP operating income from last quarter to this quarter, I think it went from 3.2 to 3.8, if our calculations are correct, and it seems like it is on the gross profit side but could you talk about why your margin expectations have increased?
• Are you seeing less price competition in the media categories? Are there any other things that you want to mention that have improved your optimism on your operating margins?

Thomas J. Szkutak, CFO and SVP

• In terms of the operating margins, we have improved both our top line, our CSOI, and our implied operating margins for the year. The reason for that is over really the last 90 days, we have seen certainly stronger growth, which customers are telling us that they like the selection and the pricing and the convenience that we have, and so certainly we are seeing the impact of that higher growth, particularly in North America.

Imran Khan JP Morgan

• Thank you very much for taking my questions, two questions; first, if I look at your EGM growth rate in the international market, it decelerated 16 percentage points on a year-over-year basis from 50 to 34.
• I am just trying to understand if there’s anything specific to this quarter. How should we think about the EGM growth rate in the international market, excluding foreign exchange going forward?
• Secondly, clearly Amazon Prime was a big success in the U.S. Are you thinking to roll it out in the international market? Thank you.

Thomas J. Szkutak, CFO and SVP

• Sure. In terms of our international EGM growth, it was 34%, so it was solid growth for the quarter but it was down from what it has been more recently. What we did see though was a, on a units basis, we saw an acceleration of unit growth in Q1 for international EGM versus what we have seen in recent quarters.
• Part of that is this mix that we talked about for third party with the launching of merchants in a few of the countries that I mentioned earlier, so we are pleased certainly with the unit growth that we saw.
• In terms of Prime, we are certainly very happy with what we are seeing in North America and we will have to wait and see what that means going forward as it relates to other geographies.

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