) fourth quarter earnings of 21 cents missed the Zacks Consensus
Estimate by 8 cents (27.6%). However, shares appreciated 8.9% in
extended trading, more than making up for the 5.7% decline during
the day, due to operating margin improvement for the first time
in five quarters.
Amazon reported revenue of $21.3 billion, up 54.0%
sequentially and 22.0% from the year-ago quarter. This was in
line with the guidance for the quarter of $20.3-22.8 billion (up
55.7% sequentially, or up 23.3% year over year at the mid-point),
although short of our expectations. Year-over-year revenue growth
was 23% excluding unfavorable currency impact.
Around 57% of sales were generated in North America,
representing a sequential increase of 54.4% and a year-over-year
increase of 23.0%. The balance came from the International
segment, which grew 53.5% sequentially and 20.8% year over year
(23% excluding unfavorable currency impact).
Active customer accounts increased by 12 million to more than
188 million. Active seller accounts stayed above 2 million. Paid
(third-party) units were 39% of total units in the third quarter,
compared to 41% in the second quarter.
Key strategies for driving revenue growth remain a vast
selection, competitive pricing, free shipping, user experience on
Amazon properties and the Amazon Prime program. Fulfillment
centers are also important, since they are essential for
providing the level of customer service that Amazon customers
have come to expect of the company. Over the past year, Amazon
has been investing heavily in fulfillment and technology &
Amazon's North America Media business was up 31.1%
sequentially and 13.3% from last year to 14% of total revenue.
The consumption of digital content across categories is helping
the business. While selling and lending books on the Kindle
platform continues, Amazon is also developing its direct
In addition to Kindle ebooks, Amazon is going great guns with
its video content. Prime Instant Video has the broadest reach,
) Xbox 360,
) Playstation 3,
) Mac or other PCs, as well as on TV.
Additionally, titles were expanded to 36,000 movies and TV
episodes in the last quarter. Amazon's reach and value
proposition are making it a key player in the video distribution
business. The category saw strong double-digit growth in four of
the last five quarters.
The Electronics and General Merchandise (EGM) business in
North America (40% revenue share) was up 68.0% sequentially and
23.6% from last year. EGM is a more seasonal business with
holiday-driven spending having a significant impact.
This seasonality has increased manifold since Amazon launched
the Kindle platform. Therefore, year-over-year comparisons are
more meaningful. We see very strong double-digit growth in each
quarter since December 2009, which is indicative of the expansion
in the market and Amazon's growing position within it.
Amazon's International media business (17% of total revenue)
was up 51.4% sequentially and 4.8% year over year. EGM, which was
around 26% of total revenue, grew 55.3% sequentially and 34.7%
from last year. This seems to indicate a greater preference for
purchasing electronics rather than content in international
Once the electronics business gains momentum and Amazon has
enough fulfillment centers set up, we expect further investment
in content. Amazon now has Kindle stores in Brazil, Canada, China
and Japan where thousands of local language books are being sold.
Therefore, new product categories, better selection within
categories, competitive prices and free shipping remain
The Other segment, while still small (around 4% of total
revenue, mostly in North America) includes Amazon Web Services
(AWS). The North America business grew double-digits from both
the previous and year-ago quarters. Growth in the international
business was strong on a sequential basis, but not with respect
to the comparable quarter of the prior year. During the year, AWS
launched 159 new services and also reduced prices.
The gross margin shrunk 113 bps sequentially and expanded 347
bps year over year to 24.1%. Sequential variations in gross
margins are usually largely mix-related, although pricing is
growing into an important factor given the increase in product
categories all over the world.
The fact that new product launches come hand in hand with
extra launch costs, is also a negative for the gross margin.
Third party sites are also doing well, which has a positive
Gross profit dollars were up 47.2% sequentially and 42.5% from
last year, due to volume changes. The increase from last year is
very encouraging, indicating that any margin declines are being
more than compensated by higher volumes. It also indicates that
Amazon brings a value proposition for customers that make them
stick with it.
Amazon's operating expenses of $4.7 billion were up 34.5%
sequentially and 41.5% from the year-ago quarter. Amazon's heavy
investing activities (headcount, fulfillment centers, content,
etc) over the past few quarters have been driving up its costs.
Specifically, fulfillment, marketing, technology and content, and
general and administrative expenses as a percentage of sales were
up 110 bps, 60 bps, 138 bps and 5 bps, respectively from a year
ago. All except marketing costs were down on a sequential
As a result, the operating margin of 1.9% was up 211 bps and
41 bps, respectively from the previous and year-ago quarters. The
operating loss of $405 million was up significantly from a loss
of $28 million and a profit of $260 million in the previous and
year-ago quarters, respectively.
The North America segment operating margin was up 130 bps
sequentially and 212 bps from the year-ago quarter. The
International segment operating margin was up 177 bps
sequentially and down 158 bps from the year-ago quarter (a lot of
the investment over the past year was in this segment).
EBITDA was $1.3 billion, up 75.2% sequentially and 67.4% from
last year. The cash margin of 6.1% was up from 5.4% in the
previous quarter and 4.5% in the year-ago quarter.
Amazon generated third quarter net income of $97 million, or a
0.5% net income margin, compared to loss of $274 million, or
-2.0% in the previous quarter and income of $187 million, or 1.1%
net income margin in the same quarter last year.
There were no one-time items in the last quarter. Therefore,
the GAAP earnings were same as the pro forma earnings of 21 cents
a share compared to loss per share of 60 cents in the previous
quarter and profit of 40 cents per share in the year-ago
Balance Sheet and Cash Flow
Amazon ended with a cash and investments balance of $11.4
billion, up $6.2 billion during the quarter. The company
generated $5.1 billion of cash from operations, spending $2.0
billion on fixed assets (including internal-use software and
website development costs), $35 million on acquisitions net of
cash acquired and $156 million to pay down debt and long term
obligations. The huge improvement in the cash position was partly
on account of $3.1 billion raised through long term debt
offerings during the quarter.
Amazon saw inventories increase 19.1% sequentially, with turns
increasing from 8.1X to 10.7X. Receivables increased in the
quarter, with DSOs dropping a couple of days to 14.
Management provided guidance for the first quarter of 2013.
Accordingly, revenue is expected to come in at around $15.0-16.6
billion (down 25.7% sequentially, or up 19.8% year over year at
the mid-point), below expectations of $16.9 billion. Operating
income/loss (including $285 million for stock based compensation
and amortization of intangible assets) is expected to come in at
approximately -$285 to $65 million.
There was little change in Amazon's fourth quarter barring a
strong holiday season, which led to a slight improvement in the
operating margin that we can only describe as seasonal. Therefore
our thesis remains unchanged.
We continue to believe in Amazon's prospects, especially its
platform approach (Kindle, Prime and the still small but growing
AWS). We think that Amazon is performing true to form, continuing
to grow revenue and generate very strong cash flow quarter upon
quarter (discounting seasonal variations).
As such Amazon remains one of the leading players in the
fast-growing ecommerce market. The increase in users, units and
partners overall indicates that it is outgrowing the ecommerce
market. We think that this has been possible in the past because
of the broad selection, free shipping and user experience that
Amazon has consistently provided. This has enabled the company to
gain from the shift in offline to online consumption.
The Kindle platform will remain a major growth platform for
Amazon. Despite the Mini from Apple, we think Amazon devices come
with their own value proposition, so there will be many
Amazon has the huge task of maintaining its U.S. market share
and expanding globally. We expect share losses, but think that
the market will expand fast enough for Amazon to maintain a solid
However, this is dependent on its own capacity to serve
customers, especially in international markets, where growth
rates are likely to be higher and its own facilities fewer. As a
result, both fulfillment and technology & content investments
will likely continue to grow. We do not consider this negative,
since differentiation among online retailers is very difficult
and better experience and support are the things that can drive
While the increase in operating expenses is a negative impact
on the bottom line, we believe this is necessary. We expect the
operating leverage to translate into accelerated growth in future
quarters. However, the uncertainty regarding the timeline
remains, which is the reason we remain Neutral on the shares.
Amazon shares currently carry a Zacks Rank #3 (Hold).
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