Amazon.com’s (AMZN) first quarter earnings missed the Zacks Consensus Estimate by 16 cents, or 26.7% on revenues that beat the Zacks Consensus by 3.6%.
Amazon’s bottom line surprises have not been exceptional in the recent past, with the average negative surprise in the preceding four quarters at 0.88%. A lot of this was on account of management’s decision to invest in the business. As a result, investors were not too put out by the quarter’s performance, as reflected in the 0.71% decline in share prices in the after-market.
Revenue
Amazon reported revenue of $9.85 billion, which was down 23.9% sequentially and up 38.2% year over year (exceeding the mid-point of management’s guided range).
Approximately 55% of sales were generated in North America, representing a sequential decline of 24.2% and a year-over-year increase of 44.6%. The balance came from the International segment, which declined 23.4% sequentially and increased 31.1% year over year. The sequential declines in the last quarter were because of seasonality.
The revenue growth was attributable to a 51% increase in units and an increase in active customer accounts to more than 137 million. Amazon also benefited from higher third-party sales, which are a percentage of revenue earned by its partners on goods sold in its online marketplaces. Active seller accounts stayed above 2 million, with seller units at 33% of total units sold on Amazon properties.
Key strategies for driving revenue growth remain a vast selection, competitive pricing, free shipping, user experience on Amazon properties and the Amazon Prime program. Amazon is delivering on all these fronts, which appear to be increasing engagement on its properties.
Segment Details
Amazon’s North America Media business declined 20.5% sequentially and grew 18.0% year over year.
The Electronics and General Merchandise (EGM) business in North America was down 27.5% sequentially and up 63.2% from last year. The company records ebook sales through Kindle devices under this segment. Amazon stated that books sold on the Kindle platform remained very strong and special offers are being made to increase adoption.
The International segment was down 23.4% sequentially and up 31.1% year over year. The media business (21% of total revenue) declined 27.6% sequentially, while increasing 13.1% year over year. EGM, which was around 23% of total revenue dropped 19.4% sequentially, but jumped 53.5% from last year. The addition of new product categories, better selection within categories, competitive prices and stronger sales from Prime combined to generate these results. Kindles launched internationally also did well.
Gross Margin
The gross margin increased 250 bps sequentially to 20.3% but, shrunk 4 bps from the year-ago quarter. This is not atypical for Amazon, since the company usually sees declines in the fourth quarter, driven by greater discounts and incentives offered during the holiday season.
So the first quarter usually looks good in comparison. In the normal course, sequential variations in gross margins are largely mix-related, although pricing is growing into an important driver 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 usually impacts the margin.
Gross profit dollars declined 14.5% sequentially and increased 38.0% from last year. The sequential decline is volume-related and should not be considered negative. On the other hand, the increase from the year-ago quarter is indicative of a much stronger business and the fact that Amazon has not been sacrificing margins to drive sales.
Operating Metrics
Amazon’s operating expenses of $1.9 billion were down 10.7% sequentially and up 55.9% from the year-ago quarter. Given the 38% year-over-year increase in sales, it is not surprising that the operating margin shrunk 226 bps.
It is fairly obvious that the company is investing heavily in the business, especially on technology and content (up 187 bps sequentially as a percentage of sales and 74 bps year over year). The other area that Amazon is focusing on is fulfillment, which was up 26 bps sequentially and 102 bps year over year as a a percentage of sales.
Other expenses were also on the rise. Amazon added 13 fulfillment centers last year ending the year with 52 fulfillment centers. It expects to add nine more this year.
The operating margin of 3.3%, was down 39 bps sequentially and 226 bps year over year. Operating profit dollars were down 32.1% sequentially and 18.3% year over year.
The North America operating margin expanded 122 bps sequentially although this was 192 bps lower than the year-ago quarter. The International segment operating margin shrunk 172 bps sequentially and 300 bps from the year-ago quarter. The International segment decline was largely related to pricing and further impacted by higher costs of operation, as Amazon continues to increase selection and product lines and also expand geographically.
EBITDA was $634 million, down 16.9% sequentially and up 5.7% from last year. The cash margin was 6.4%, up sequentially, but down from the year-ago quarter.
Net Income
Amazon generated fourth quarter net income of $201 million, or a 2.0% net income margin, compared to $416 million, or 3.2% in the previous quarter and $301 million, or 4.2% net income margin in the same quarter last year. There were no one-time items in the last quarter. The GAAP EPS came in at 44 cents compared to 91 cents and 66 cents in the previous and year-ago quarters, respectively.
Balance Sheet and Cash Flow
Amazon ended with a cash and investments balance of $6.88 billion, down $1.9 billion during the quarter. The company used $1.6 billion of cash in operations, spending $298 million on fixed assets (including internal-use software and website development costs), $139 million on acquisitions and $111 million to pay off all its long term debt.
Despite the 9.8% sequential decline in inventory, turns dropped from 12.9X to 10.5X. The receivables balance declined as may be expected, with DSOs increasing slightly from 11 to 12 days.
Guidance
Management provided guidance for the first quarter of 2011. Accordingly, revenue is expected to come in at around $8.85-9.65 billion (down 6.2% sequentially, or up 40.9% year over year at the mid-point), better than consensus expectations of around $8.73 billion. Operating income (including stock based compensation of around $180 million) is expected to come in at approximately $95-245 million.
Our Take
We remain positive about Amazon shares, despite the earnings miss in the last quarter.
Amazon is one of the leading players in an extremely fast-growing market. The growth in users, units and partners overall indicates that it is outgrowing the ecommerce market.
We think 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. Additionally, Prime has helped retain customers.
If Amazon is to grow from these levels, it would need to invest in its support infrastructure, which includes its fulfillment centers. It would also need to observe consumer behavior and develop suitable algorithms to maximize returns for itself and its partners. Therefore, we cannot fault management’s strategy of investing in the company at this time. We think that other online players, such as eBay Inc. (EBAY) and Google Inc (GOOG) are doing likewise.
We believe that the current weakness in the shares would be a buying opportunity, since investments made today would drive the business going forward. We expect the operating leverage to translate into accelerated growth towards the end of the year. However, we feel that there is some uncertainty regarding the timeline, which is the main reason for our Neutral stand on the shares.
Amazon shares currently carry a Zacks #3 Rank , which translates to a Hold recommendation in the short term (1-3 months).
AMAZON.COM INC (AMZN): Free Stock Analysis Report
EBAY INC (EBAY): Free Stock Analysis Report
Be the first to comment