) reported a 27 cents loss in the second quarter, missing the Zacks
Consensus Estimate of a loss of 13 cents. Amazon hasn't had a very
good track record of late, missing estimates as often as it beats
them. This could be because management doesn't care for earnings
guidance and focuses on opportunistic purchases of content and
capacity that are announced at opportune moments.
Amazon.com, Inc - Earnings Surprise |
There is no doubt that Amazon is good at driving penetration
rates and picking up market share. But the company seems bent on
spending huge amounts of money for staggeringly low returns, which
makes results and share prices extremely volatile. For instance,
the 14 cent miss in the last quarter sent shares down 10.6% in
The numbers in detail-
Amazon reported revenue of $19.34 billion, down 2.0%
sequentially and up 23.2% from the year-ago quarter. This was
within the guidance range of $18.1-19.8 billion (down 4.0%
sequentially, or up 20.7% year over year at the mid-point) and in
line with our expectations.
Both product and service sales grew double-digits from the
year-ago quarter, with the percentage contribution of the two
categories at 79% and 21%, respectively.
Around 62% of sales was generated in North America, representing
sequential and year-over-year growth of 1.2% and 26.4%,
respectively. The balance came from the International segment,
which grew -6.9% sequentially and 18.2% year over year (14%
excluding favorable currency impact).
Active customer accounts increased 6 million to more than 250
million. Active seller accounts stayed above 2 million. Paid
(third-party) units were 41% of total units in the quarter, up 1
percentage point from the previous 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 & content.
Amazon's North America
business was down 12.8% sequentially and up 13.4% from last year to
13% of total revenue. Growth continues to be driven by the
consumption of digital content across categories (books, music,
The Electronics and General Merchandise (
) business in North America (43% revenue share) was up 6.9%
sequentially and 29.1% 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.
business (12% of total revenue) was down 9.9% sequentially and up
7.0% year over year.
, which was around 25% of total revenue, was down 5.3% sequentially
and up 24.8% from the year-ago quarter. There remains a preference
for electronics instead of content in international locations,
which is why Amazon has been increasing its fulfillment centers.
Amazon has also launched Kindle stores in many international
markets including Brazil, Canada, China, Japan and Mexico, where
thousands of local language books are being sold. New product
categories, better selection within categories, competitive prices
and free shipping remain drivers.
The Other segment is still small (around 6% of total revenue,
mostly in North America) and includes Amazon Web Services (AWS).
The North America business was down 3.0% sequentially and up 38.4%
from the year-ago quarter. The International contribution was down
5.7% from the previous quarter and up 4.2% from the year-ago
quarter. AWS continues to launch new services and enhance the
security of its services. In the last quarter, Amazon again reduced
prices significantly, which was the reason for the revenue decline
in the last quarter. Management stated that usage increased
The gross margin expanded 192 bps sequentially and 210 bps year
over year to 30.7%. 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. Amazon's strategy of heavily discounting products and
services when it is building a position in any market also has an
effect. Third party sites are doing well, which has a positive
Gross profit dollars were up 4.5% sequentially and 32.2% from
last year. The consistently rising gross profit dollars from
year-ago periods indicates steadily rising business volumes. It
also indicates that Amazon brings a value proposition for customers
that encourage them to stick with it.
Amazon's operating expenses of $5.96 billion were up 7.5%
sequentially and 34.9% 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 & content and
G&A costs increased year over year as a percentage of sales by
62 bps, 58 bps, 141 bps and 13 bps, respectively.
As a result, the operating margin of -0.1% shrank 82 bps
sequentially and 58 bps from the year-ago margin. Amazon reported
an operating loss of $15 million compared to a profit of $146
million in the previous quarter and $79 million in the year-ago
The North America segment operating margin was down 109 bps
sequentially and 66 bps from the year-ago quarter. The
International segment operating margin was up 30 bps sequentially
and down 46 bps from the year-ago quarter.
EBITDA was $1.49 billion, up 0.5% sequentially and 31.1% from
last year. The cash margin of 7.7% increased from 7.5% in the
previous quarter and 7.2% in the year-ago quarter.
Amazon generated third quarter net loss of $126 million, or 0.7%
of sales, compared to income of $108 million, or 0.5% in the
previous quarter and loss of $6 million, or 0.0% in the same
quarter last year. There were no one-time items in the last
quarter. Therefore, the GAAP EPS was the same as the pro forma EPS
of -$0.25 compared to $0.23 in the previous quarter and
-$0.01 in the year-ago quarter.
Balance Sheet and Cash Flow
Amazon ended with a cash and investments balance of $7.99
billion, down $680 million during the quarter. The company
generated $862 million of cash from operations and spent $1.29
billion on fixed assets (including internal-use software and
website development costs).
Amazon saw inventories fall 1.1% sequentially, with turns down
from 8.4X to 8.1X. Receivables grew in the quarter, with DSOs up
from 18 to 19.
Management provided guidance for the third quarter of 2014.
Accordingly, revenue is expected to come in at around $19.7-21.5
billion (up 6.5% sequentially and 20.5% year over year at the
mid-point), below seasonality and roughly in line with street
estimates. Operating loss (including $410 million for stock based
compensation and amortization of intangible assets) is expected to
come in at approximately $810 to $410 million.
Amazon has taken a very aggressive stand to maintain supremacy
in its chosen markets.
The company's strategy to boost media consumption is two-fold.
On the one hand, it is aggressively acquiring and creating new
content, whether it is books, music or other video. On the other
hand, it is trying to get consumption onto a common platform such
as Prime Music, Prime Instant Video and now, Kindle Unlimited. The
platform model will be a natural boost to consumption, since the
more a person consumes, the cheaper it gets for him/her on a
per-unit basis. This would attract more users, which in turn would
give Amazon leverage against content providers and help it drive
down costs. The ultimate winner is the consumer with Amazon's
benefits largely coming from scale.
The challenge to this business model comes from competing
ecosystems from Google (
) and Apple (
). Apple is leveraging its high-quality devices and Google its
operating systems to drive media sales. Apple is more of a
competitor for Amazon because it already accounts for a chunk of
ecommerce sales. But Google should also not be discounted because
its Play sales are growing rapidly. So Amazon needs to have
competing devices to provide suitable options to its loyal
customers and also, hopefully, draw more customers to its own
ecosystem. This is the reason it was quick to get into the tablet
market and has also introduced a new Fire phone. We should expect
more devices from Amazon (think Glass, smartwatch, etc) and
increased execution risk.
One of the major positives driving the gross margin is Amazon's
shipping costs, which the company has been lowering by building
closer-to-consumer fulfillment centers and a "local" strategy that
gives consumers the option to pick up the product at a nearby
store. If it is able to further automate the process, there could
be further cost reduction here and resultant improvements in gross
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). But uncertainty
regarding its investment plans and the probability of continuing
losses in the near term leads us to recommend investors to avoid
Amazon shares carry a Zacks Rank #5 (Strong Sell). A
better-ranked stock from the same sector is Chinese ecommerce
company Ecommerce China Dangdang (
), which has a Zacks Rank #2 (Buy).
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