Amazon (NASDAQ:AMZN) reported its FY 2012 earnings Tuesday, with revenues growing to $61 billion, up 27% year-over-year. Most of its sales growth was driven by the strong sales of electronics and other general merchandise, which grew at about 34% in the North American markets and 35% in international markets. Amazon’s operating margins as a percent of consolidated sales rose to 3.2% from 2.7% a year ago.
The primary factor behind the growth in margins was the success of third party sellers on Amazon’s marketplace. We believe that the company’s push towards setting up fulfillment centers will result in further margin improvement in 2013. The growing popularity of the content and web services businesses which have higher margins will also help profitability going forward. Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).
Electronic And General Merchandise Lead Revenue Growth
The Electronic And General Merchandise division continued to lead revenue growth in 2012 as sales increased 35% to $38.6 billion. Worldwide, the contribution of EGM to overall sales increased to about 65%.
The North America segment still contributes the majority of revenues to EGM sales, which accounts for about 65% of total North America sales. Internationally, EGM sales grew 35% to $15.3 billion and now represents almost 60% of international revenues, up from 54%.
Media revenues also grew at 12% during the year to $20 billion. The division recorded 15% growth in North America and 10% internationally. North America and international operations contribute equally to media revenues.
The company is currently in the process of expanding its Kindle store into developing regions like Brazil, China and Europe. We expect the contributions from these regions to be the growth driver for media revenues in the coming years. The eBooks business which was non-existent till some years ago is now a multi-billion dollar business for Amazon and is growing at approximately 70% annually.  Amazon’s heavy investments in the Kindle device range and electronic content seem to have started paying off. We expect a growth in e-content sales to help the company further improve its margins.
Margins Improvement Expected To Continue
The company surprised investors with an improvement in margins in the fourth quarter. This helped it post an operating profit of $405 million in Q4, up from an operating loss of $28 million in Q3 2012. Gross margins improved from 22.4% in 2011, to 24.8% in 2012, which is due to the success of third party sellers on Amazon’s marketplace.
During Q4, third party sales made up 39% of units purchased compared with 36% the year before. These purchases boost margins because Amazon collects a commission on any item sold by an outside vendor and incurs almost negligible costs. Many of those shoppers will be buying material that originated not with Amazon, but with more than two million third-party sellers.
Amazon’s famed efficient fulfillment system however, seems to be under some strain in the near term as the fulfillment expenses jumped a percentage point from about 9% of revenues in 2011 to about 10% of revenues in 2012. Multiple fulfillment centers currently under construction are expected to become operational over the next year and so these expenses should return to more normal levels in 2013.
We have a $218 Trefis price estimate for Amazon which is being revised.