Ecommerce retailer Amazon.com (Nasdaq:AMZN) reported surging second quarter sales, although its net income slipped compared to last year's same quarter. Operating expenses increased as expected, cutting into the bottom line. The market, however, favored the growth story for now and sent shares immediately higher in after-hours trading.

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Spending and Growth the Story
The market was far less interested in Amazon's earnings story except to use that information to glean where the company is going. Specifically, after an earnings miss last quarter, when Amazon talked about investing in infrastructure such as fulfillment centers - more mundanely known as warehouses - and other expansion initiatives, the market was anxious about Amazon's spending plans. True to its word, the company announced six new fulfillment centers in the Q2 in addition to the nine it announced last quarter. The company now has 52 such centers, with 13 added in 2010.

Operating expenses increased more than 63 percent year-over-year, and 13.5 percent sequentially, to $2.2 billion. Amazon added workers while other expenses rose as well. Operating margins were 2 percent, down from 4.08 percent a year ago and 3.24 percent from the previous quarter. North American and international operating margins shrunk also, as did EBITDA, as most of the operating metrics reflected this intensified spending story. Gross margins fell 42 basis points year-over-year to 24.1 percent, though this is a 127 basis-point sequential increase. Again, the spending and costs pressed margins down.

Amazon is long past confining itself to the book or e-book selling space where Barnes & Noble (NYSE:BKS) is, or competing only with eBay (Nasdaq:EBAY) via Amazon's own marketplace. Amazon's field of play continues to dramatically expand. Its recent hook-up with CBS (NYSE:CBS) to stream CBS television programming content, as part of its Amazon Prime service, reinforces just how serious Amazon is about challenging Netflix (Nasdaq:NFLX).

Sales Skyrocket
Amazon's net sales reached $9.91 billion for the quarter, a 51 percent increase from last year's Q2 sales of $6.5 billion. So the company can clearly argue that its spending initiatives are paying off in revenue growth. Net income was down, though, to $191 million, or 41 cents a share, compared to $207 million, or 45 cents a share, in the year-earlier quarter. For the trailing 12 months, operating cash flow increased to $3.21 billion from $2.56 billion.The company reported accelerated sales of Kindles, but it doesn't break out specific numbers on this, and it is expected to introduce its own tablet device in the next quarter.

Outlook
Amazon expects sales between $10.3 billion and $11.1 billion in the Q3, which would average roughly a 40 percent increase from the same quarter in 2010. It forecasts operating income in a wide range of from $20 million to $170 million, which would be a 93 percent decline on the low end and a 37 percent decline on the high end. Again, this guidance puts investors on notice that the spending, while swelling the top line, will not make it to the bottom line in Q3.

Future Growth
Amazon is investing not just in warehouses, but in technology such as its Amazon Web Services (AWS) for its cloud computing business. Amazon has been ramping up its offsite data storage systems to take advantage of the boom for selling cloud services, but it's also continuing to invest in technology in other ways for its e-commerce business. The company indirectly adds or reinforces these primary investments, for example, by paying for 3G wireless connectivity for its Kindle customers, and it has lowered prices for its AWS. Customer retention and growth is still a large part Amazon's longer-term view, as well as continued expansion of its North American base and international growth.

The Bottom Line
Investors have accepted for now the spending plans of Amazon, but they will want to see bottom-line growth in a couple of quarters. Markets can be notoriously impatient and fickle as well. Amazon intends to grow, but will it grow fast enough and far enough for the market? (For additional stock analysis, see ConocoPhillips Is A Strong Buy.)

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