Amazon.com (AMZN) missed revenue expectations by a sliver, but easily beat on the bottom line.
Amazon.com's fourth quarter earnings beat the Zacks Consensus Estimate by 3 cents, or 3.4%. However, what preyed on investor sentiments was the company's revenues, which were just 0.2% short of the Zacks Consensus Estimate. This caused share prices to crash (down 9.38%) in the after-market.
We think analysts were factoring in a higher growth rate in the International business, which Amazon said was helped by new products launched in the year-ago quarter that did not repeat last quarter.
We also wonder how much market share the Kindle lost to Apple Inc's (AAPL) iPad (or other tablets and ereaders), which may only be expected given its leading market position and the way any consumer market functions. The Kindle app is the solution to this problem and the number of devices on which it is available continues to grow. Amazon's selection remains the broadest, and ebook sales remain strong.
Amazon's top line has not been beating the Zacks Consensus by a wide margin in the last few quarters and the miss in the last quarter was not really that great. The company did deliver on the bottom line, despite the fact that new fulfillment centers and new product lines (that are always priced aggressively) impacted its margins (something we expect will continue for a few more quarters). However, we note that Amazon's cash flows were as strong as ever.
All things considered, we think Amazon had a decent quarter, and investor reaction looks overdone.
Revenue
Amazon reported revenue of $12.95 billion, which was up 71.3% sequentially and 36.0% year over year (higher than the mid-point of management's guided range).
Approximately 56% of sales were generated in North America, representing sequential and year-over-year increases of 74.8% and 45.5%, respectively. The balance came from the International segment, which grew 67.1% sequentially and 25.7% year over year. International grew 48.5% in the year-ago quarter (the reason for the variation from analyst estimates).
The revenue growth was attributable to a 43% increase in units and an increase in active customer accounts to 130 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 30% 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.
Segment Details
Amazon's North America Media business increased 49.0% sequentially and 12.9% year over year. Overall media sales were strong across the board, with particular strength in paperbacks.
The Electronics and General Merchandise (EGM) business in North America increased 96.0% sequentially and 71.2% from last year. The company records ebook sales through Kindle devices under this segment. Amazon stated that books sold on the Kindle platform outgrew paperbacks for the first time, a couple of quarters ahead of schedule.
Management declined to comment on the impact of sales through the Kindle app or the agency model that were included in EGM results in the last quarter. The sequential increase in December 2009 was greater than in this year, which could be because Amazon is conceding some market share to the iPad, or Sony Corp's (SNE) Reader, or the many other players that started flooding the market in 2010.
The International segment was up 67.1% sequentially and 25.7% year over year. The media business (22% of total revenue) grew 62.9% sequentially and 11.0% year over year. EGM, which was around 22% of total revenue grew 72.4% sequentially and 45.6% year over year. The addition of new product categories, better selection within categories, competitive prices and stronger sales from Prime combined to generate these results.
Gross Margin
The gross margin declined 315 bps sequentially to 20.3% and 44 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.
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. Additionally, new product launches come hand in hand with extra launch costs, which also negatively impact the gross margin. Third party sites are also doing well, which usually impacts the margin.
Gross profit dollars increased 48.3% sequentially and 33.1% from last year.
Operating Metrics
Amazon's operating expenses of $2.2 billion were up 43.2% sequentially and 43.8% from the year-ago quarter. All expenses declined sequentially, but increased year over year (as a percentage of sales). Technology & content expenses saw the greatest sequential decline (184 bps).
However, compared to the year-ago quarter, the increases in fulfillment and technology & content expenses were the most significant (up 49 bps and 33 bps, respectively). Amazon ended the year with 52 fulfillment centers and expects to add more this year.
The operating margin of 3.7%, was up 12 bps sequentially and down 134 bps year over year. Operating profit dollars were up 76.9% sequentially and flat compared to the year-ago quarter.
The North America operating margin shrunk 42 bps sequentially and 152 bps from the year-ago quarter. The International segment operating margin shrunk 56 bps sequentially and 129 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. North America margin declines appear to be stabilizing and the next quarter could be bottom.
EBITDA was $763 million, up 45.3% sequentially and 11.1% from last year. The cash margin was 5.9%, down from both the previous and year-ago quarters.
Net Income
Amazon generated fourth quarter net income of $416 million, or a 3.2% net income margin, compared to $231 million, or 3.1% in the previous quarter and $386 million, or 4.1% 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 91 cents compared to 51 cents and 85 cents in the previous and year-ago quarters, respectively.
Balance Sheet and Cash Flow
Amazon ended with a cash and investments balance of $8.76 billion, an increase of $2.9 billion during the quarter. The company generated $3.5 billion of cash from operations, spending $328 million on fixed assets (including internal-use software and website development costs), $271 million on acquisitions and $100 million to pay off all its long term debt.
We note that inventories increased 65.5% sequentially. Amazon stated that inventories were increased deliberately to restock a far wider range of products across geographies, but it could be that internal expectations were for a more robust quarter (guidance could have been conservative).
Guidance
Management provided guidance for the first quarter of 2011. Accordingly, revenue is expected to come in at around $9.1-9.9 billion (down 26.6% sequentially, or up 33.2% year over year at the mid-point), better than consensus expectations of around $9.3 billion. Operating income (including stock based compensation of around $140 million) is expected to come in at approximately $260-385 million.
Our Recommendation
We have a short-term Hold recommendation on Amazon shares, as indicated by the Zacks #3 Rank. Our longer-term view is also neutral, since the company is currently in an expansion mode that increases uncertainties regarding quarterly results that could temporarily hurt investor sentiments and therefore share prices.
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We think analysts were factoring in a higher growth rate in the International business, which Amazon said was helped by new products launched in the year-ago quarter that did not repeat last quarter.
We also wonder how much market share the Kindle lost to Apple Inc's (AAPL) iPad (or other tablets and ereaders), which may only be expected given its leading market position and the way any consumer market functions. The Kindle app is the solution to this problem and the number of devices on which it is available continues to grow. Amazon's selection remains the broadest, and ebook sales remain strong.
Amazon's top line has not been beating the Zacks Consensus by a wide margin in the last few quarters and the miss in the last quarter was not really that great. The company did deliver on the bottom line, despite the fact that new fulfillment centers and new product lines (that are always priced aggressively) impacted its margins (something we expect will continue for a few more quarters). However, we note that Amazon's cash flows were as strong as ever.
All things considered, we think Amazon had a decent quarter, and investor reaction looks overdone.
Revenue
Amazon reported revenue of $12.95 billion, which was up 71.3% sequentially and 36.0% year over year (higher than the mid-point of management's guided range).
Approximately 56% of sales were generated in North America, representing sequential and year-over-year increases of 74.8% and 45.5%, respectively. The balance came from the International segment, which grew 67.1% sequentially and 25.7% year over year. International grew 48.5% in the year-ago quarter (the reason for the variation from analyst estimates).
The revenue growth was attributable to a 43% increase in units and an increase in active customer accounts to 130 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 30% 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.
Segment Details
Amazon's North America Media business increased 49.0% sequentially and 12.9% year over year. Overall media sales were strong across the board, with particular strength in paperbacks.
The Electronics and General Merchandise (EGM) business in North America increased 96.0% sequentially and 71.2% from last year. The company records ebook sales through Kindle devices under this segment. Amazon stated that books sold on the Kindle platform outgrew paperbacks for the first time, a couple of quarters ahead of schedule.
Management declined to comment on the impact of sales through the Kindle app or the agency model that were included in EGM results in the last quarter. The sequential increase in December 2009 was greater than in this year, which could be because Amazon is conceding some market share to the iPad, or Sony Corp's (SNE) Reader, or the many other players that started flooding the market in 2010.
The International segment was up 67.1% sequentially and 25.7% year over year. The media business (22% of total revenue) grew 62.9% sequentially and 11.0% year over year. EGM, which was around 22% of total revenue grew 72.4% sequentially and 45.6% year over year. The addition of new product categories, better selection within categories, competitive prices and stronger sales from Prime combined to generate these results.
Gross Margin
The gross margin declined 315 bps sequentially to 20.3% and 44 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.
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. Additionally, new product launches come hand in hand with extra launch costs, which also negatively impact the gross margin. Third party sites are also doing well, which usually impacts the margin.
Gross profit dollars increased 48.3% sequentially and 33.1% from last year.
Operating Metrics
Amazon's operating expenses of $2.2 billion were up 43.2% sequentially and 43.8% from the year-ago quarter. All expenses declined sequentially, but increased year over year (as a percentage of sales). Technology & content expenses saw the greatest sequential decline (184 bps).
However, compared to the year-ago quarter, the increases in fulfillment and technology & content expenses were the most significant (up 49 bps and 33 bps, respectively). Amazon ended the year with 52 fulfillment centers and expects to add more this year.
The operating margin of 3.7%, was up 12 bps sequentially and down 134 bps year over year. Operating profit dollars were up 76.9% sequentially and flat compared to the year-ago quarter.
The North America operating margin shrunk 42 bps sequentially and 152 bps from the year-ago quarter. The International segment operating margin shrunk 56 bps sequentially and 129 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. North America margin declines appear to be stabilizing and the next quarter could be bottom.
EBITDA was $763 million, up 45.3% sequentially and 11.1% from last year. The cash margin was 5.9%, down from both the previous and year-ago quarters.
Net Income
Amazon generated fourth quarter net income of $416 million, or a 3.2% net income margin, compared to $231 million, or 3.1% in the previous quarter and $386 million, or 4.1% 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 91 cents compared to 51 cents and 85 cents in the previous and year-ago quarters, respectively.
Balance Sheet and Cash Flow
Amazon ended with a cash and investments balance of $8.76 billion, an increase of $2.9 billion during the quarter. The company generated $3.5 billion of cash from operations, spending $328 million on fixed assets (including internal-use software and website development costs), $271 million on acquisitions and $100 million to pay off all its long term debt.
We note that inventories increased 65.5% sequentially. Amazon stated that inventories were increased deliberately to restock a far wider range of products across geographies, but it could be that internal expectations were for a more robust quarter (guidance could have been conservative).
Guidance
Management provided guidance for the first quarter of 2011. Accordingly, revenue is expected to come in at around $9.1-9.9 billion (down 26.6% sequentially, or up 33.2% year over year at the mid-point), better than consensus expectations of around $9.3 billion. Operating income (including stock based compensation of around $140 million) is expected to come in at approximately $260-385 million.
Our Recommendation
We have a short-term Hold recommendation on Amazon shares, as indicated by the Zacks #3 Rank. Our longer-term view is also neutral, since the company is currently in an expansion mode that increases uncertainties regarding quarterly results that could temporarily hurt investor sentiments and therefore share prices.
APPLE INC (AAPL): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis Report
SONY CORP ADR (SNE): Free Stock Analysis Report
Zacks Investment Research
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