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Amazon Kicks Q2 Rear; More Shift Away From Media Sales

Amazon released its Q2 results, and the numbers are very impressive. On a year-over-year basis, net sales increased by 14 percent -- not too shabby, given the general economic climate, and even more impressive when you realize that taking exchange rate shifts into account, it would have represented 20 percent growth. A number of headlines I've seen focus on the 27 percent, or $58 million, decrease in operating income, but I think that's a bit of a red herring because of some unusual financial considerations.

Changes in foreign exchange rates dropped profits in a year-over-year comparison by $30 million. In addition, there was the settlement of the long-running Toys-R-Us suit which cost $51 million, most of which was recorded in the second quarter. Factor those two cash profit sinks out and you're back to an apples-to-apples comparison of $217 million in Q2 of 2008 and what would have been $240 million in the same period this year, which would have been operating income growth of about 10.6 percent. But there's also a third factor. In 2008, the operating income saw a one-time boost of $53 million. So, all told, the real comparative growth in operating income is closer to 46.3 percent. That is simply astounding.

Part of that may be the continuing relative strength of non-media sales. By the end of 2008, electronics and other general merchandise sales had reached almost 70 percent of media sales. In this last quarter, that jumped to 84.7 percent. I'd wager that by sometime next year, media will be a minority portionof company sales. In fact, it's quite possible that Amazon will cross that threshold before the end of this year. It's a story of diversification to which other companies in the tech space should pay close attention. Another prediction: expect other companies to make a play for Amazon managers that have been key in the diversification move.

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