Last quarter, Amazon, which has been a freight train and Wall Street darling over the last year, surprised analysts by reporting lower-than-expected earnings. Expectations were high considering the holiday shopping season, but Amazon saw net income drop 45 percent to $97 million in Q4, compared to $177 million in 2011, although on the bright side, net sales continued to increase (by 22 percent) to $21.2 billion.
Today, Amazon continued the trend, still finding itself in a bit of a hangover after missing expectations in Q4. The eCommerce giant reported earnings from Q1 after the market closed this afternoon, in which it saw cash flow increase 39 percent to $4.25 billion, compared to $3 billion for the prior year, while net sales increased 22 percent to $16.07 billion in Q1, compared to $13.18 billion in first quarter 2012.
And by mixed results, we mean that Amazon blew away earnings-per-share expectations at $0.18 in Q1 on revenue of $16 billion. Leading up to today’s announcement, Wall Street expectations were much lower for EPS, with analysts expecting $0.08 EPS for the quarter. In turn, the Street expected Amazon to report sales of $16.2 billion, which the company just missed with $16.07 billion in sales.
In spite of the mixed results, as the market has been wont to do over the last year, Amazon’s stock was trending up, closing at $274.70 per share, on rumors that the company could be launching its own TV set-top box this fall, bringing more of the company’s hardware into your living room.
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Tellingly, in today’s announcement, Amazon founder and CEO Jeff Bezos didn’t touch on the numbers or falling profits, instead plugging the company’s efforts to take on Netflix with some original programming of its own for Instant Video customers. Last week, the company launched 14 new comedy and kids pilots on Instant Video, which quickly became the “most watched TV shows on Instant Video,” the company said Monday.
“Amazon Studios is working on a new way to greenlight TV shows. The pilots are out in the open where everyone can have a say,” Bezos said in today’s earnings release. “I have my personal picks and so do members of the Amazon Studios team, but the exciting thing about our approach is that our opinions don’t matter. Our customers will determine what goes into full-season production. We hope Amazon Originals can become yet another way for us to create value for Prime members.”
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Other points of interest:
- Free cash flow fell 85 percent to $177 million year-over-year, compared to $1.15 billion in the year prior, due in part to dishing out $1.4 billion to purchase new office space in Seattle.
- Operating income decreased 6 percent to $181 million in Q1, compared to $192 million in the same quarter last year, while net income fell 37 percent to $82 million from $132 million in Q1 2012.
The upside for Amazon continues to rise, thanks to its move into original programming and the expansion of its selection for Prime Instant Video, which is in part due to new licensing agreements with A+E, CBS, FX, PBS And Scripps. This means that shows like Downton Abbey, Justified and Under The Dome, as well as content from Food Network, the Cooking Channel, the Travel Channel and HGTV will all be headed to Amazon. The company said that Prime Instant Video now has 38,000 movies and TV episodes in its collecton.
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In addition, Amazon touted the launch of its new MP3 store for Safari, which allow iPhone and iPod touch users to discover and purchase digital music from the company’s catalog. This comes on the heels of reports today that the influence of the company’s Appstore is growing and shows high revenue potential. Amazon also announced its Cloud Player for iPad and iPad Mini this quarter, extended AutoRip to vinyl records and announced the launch of Kindle Fire HD 8.9″.
Amazon MP3 Store Optimized for Safari and iOS Devices (Click Image To Enlarge)
Good news also came for authors and readers, as Amazon announced that it will start paying its authors their royalties monthly, ahead of the twice-a-year industry standard, along with the acquisition of popular book recommendation hub, Goodreads.
All in all, it was a busy quarter for Amazon, especially for AWS, which launched a slew of new products over the last few months and again lowered its prices. The company said in its announcement today that AWS “has lowered prices 31 times since it launched in 2006, including 7 price reductions so far in 2013.”
Looking forward, Amazon is lowering expectations, however, as it said today that it expects sales to come in between $14.5 billion and $16.2 billion next quarter — equivalent to a 13 to 26 percent increase from Q2 2012. In turn, it expects operating income to be between -$340 million and +$10 million. In other words, a potential loss.
In response to Amazon.com's statement of lowered earnings for the rest of 2013, on Friday, April 26, 2013, the market hammered Amazon.com (NASDAQ:AMZN) stock, as it dropped 19.89 points or down 7.24% to end trading at 254.81.
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COMMENTARY:
Highlights
In its press release issued on April 26, 2013, Amazon.com cited the following highlights for the quarter ending March 31, 2013:- Amazon.com expanded selection for Prime Instant Video, announcing new licensing agreements with A+E Networks,CBS Corporation, FX, PBS Distribution and Scripps Networks Interactive, bringing exclusive access to popular television series such as Downton Abbey, Justified and Under the Dome as well as shows from HGTV, DIY Network,Food Network, Cooking Channel and Travel Channel. Prime Instant Video now includes more than 38,000 movies and TV episodes that are available for Prime members to watch at no additional charge.
- Amazon Studios, the original film and series production arm of Amazon.com, debuted 14 original comedy and kids pilots. The pilots, which feature stars such as John Goodman, Jeffrey Tambor and Bebe Neuwirth, are available exclusively at www.amazonoriginals.com and on the Amazon Instant Video app for Kindle Fire HD, Kindle Fire, iPad, iPhone, iPod touch, Roku, Xbox 360, PlayStation 3, Wii and Wii U, as well as hundreds of other connected devices. Viewer feedback will help determine which pilots Amazon Studios will produce into full series.
- Amazon expanded the popular Kindle Fire feature “X-Ray for Movies” to TV shows, bringing the power of IMDb directly to the most popular TV shows on Kindle Fire. With a single tap viewers can discover the names of actors and what they've been in, without even leaving the TV show.
- Kindle Owners’ Lending Library has grown to over 300,000 books available to borrow for free as frequently as a book a month, including many titles exclusive to Amazon.
- Amazon announced the launch of the Amazon MP3 store optimized specifically for Safari browser. For the first time ever, iPhone and iPod touch users can discover and buy digital music from Amazon’s 22 million song catalog. Amazonalso announced its Cloud Player app for iPad and iPad mini, enabling customers to play or download music stored in Cloud Player to their device, play music that is already stored on their device, and manage or create playlists.
- Amazon announced it has extended its popular AutoRip services to vinyl records. AutoRip provides customers with free MP3 versions of CDs and vinyl records they purchase from Amazon. Additionally, customers who have purchased AutoRip CDs or vinyl records at any time since Amazon first opened its Music Store in 1998 will find MP3 versions of those albums in their Cloud Player libraries – also automatically for free.
- Amazon announced the launch of Kindle Fire HD 8.9” — the large-screen version of its best-selling tablet —for theU.K., Germany, France, Italy, Spain and Japan. With the expansion of Kindle Fire HD 8.9” to Europe and Japan,Amazon also announced a lower price on Kindle Fire HD 8.9” in the U.S., with the Wi-Fi version starting at $269 and the 4G version starting at $399.
- Amazon Publishing, the publishing arm of Amazon.com, announced that it will start paying authors their royalties monthly, 60 days in arrears — allowing authors to receive payment more frequently than the twice-a-year industry standard.
- Amazon acquired Goodreads, a leading site for readers and book recommendations that helps people find and share books they love. Goodreads members can discover new books by seeing what their friends are reading or by using the Goodreads Book Recommendation Engine; share ratings and recommendations; track what they have read, and list what they want to read.
- Amazon Web Services (AWS) announced the launch of Amazon Redshift, a fast and powerful, fully managed, petabyte-scale data warehouse service in the cloud for a fraction of the cost of a traditional data warehouse.
- AWS launched AWS OpsWorks, an application management solution for the complete lifecycle of complex applications, including resource provisioning, configuration management, deployment, monitoring, and access control.
- AWS announced Amazon Elastic Transcoder, a highly scalable service for transcoding video files between different digital media formats. Amazon Elastic Transcoder manages all aspects of the transcoding process transparently and automatically, providing scalability and performance by leveraging AWS services.
- AWS announced AWS CloudHSM, a new service enabling customers to increase data security and meet compliance requirements by using dedicated Hardware Security Module (HSM) appliances within the AWS Cloud. The CloudHSM service allows customers to securely generate, store and manage cryptographic keys used for data encryption in a way that keys are accessible only by the customer.
- AWS has lowered prices 31 times since it launched in 2006, including 7 price reductions so far in 2013.
Q1 2013 Financial Reports
Below are the following financial reports for Amazon.com for the quarter ending March 31, 2013:
- Consolidated Statement of Operations for the quarters ending March 31, 2013 and March 31, 2012.
- Supplemental Net Sales Information for the quarters ending March 31, 2013 and March 31, 2012.
- Consolidated Statements of Cash Flows for the quarters ending March 31, 2013 and March 31, 2012 and Year-Ending December 31, 2013 and December 31, 2012.
- Consolidated Balance Sheets for the quarter ending March 31, 2013 and Year Ending December 31, 2012.
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Website Traffic
Amazon.com website traffic measured by unique visitors is tracked by Compete.com (see below) has steaily increasing since March 2012, and peaked at 138.3 million unique visitors at the end of December 2012 due to Christmas shopping, but has since declined to more normal levels. At the end of March, Amazon.com reached 129.7 million unique visitors.
Amazon.com Unique Visitors, Rank by Unique Visitors and Competitie Rank by Unique Visitors as of March 31, 2013 (Click Image To Enlarge)
What's Costing Amazon.com
Although Amazon's net income for the quarter ending March 31, 2013 declined significantly from the same quarter last year, profit margins were higher in Q1 2013 than Q1 2012 -- 26.56% vs. 23.95%, but the following operating expenses as a percentage of net sales were much higher in Q1 2013 than Q1 2012:
- Fulfillment costs -- 11.18% (Q1 2013) vs 9.82% (Q1 2012).
- Technology and content costs -- 8.61% (Q1 2013) vs. 7.17% (Q1 2012).
- Marketing expenses -- 3.93% (Q1 2013) vs. 3.64% (Q1 2012).
The Potential of Amazon's Cloud Computing
As an inducement for customers, Amazon.com is absorbing a significant amount of shipping costs on some orders meeting a certain amount, but this is costing the company in the bottom line. Amazon.com has also made extenive investments in its technology infrastructure in order to keep pace with its cloud computing services, increased sales volume and higher inventory carrying costs needed to fulfill orders.
According to Quartz, a digital research firm, Amazon.com now generates $2.4 billion in revenues from its cloud computing services, which Amazon refers to as Amazon Web Services. However, at the present time, Amazon.com does not charge customers for storing digital content on its cloud service. Apple, on the other hand, charges for storing digital content purchased outside Apple's ecosystem. The addition of MP3 Store for the iPhone, could eventually generate incremental revenues for Amazon.com if iPhone users start downloading digital content from Amazon.com, since there are no cloud storage costs. Amazon.com carries a lot more music and book titles than Apple iTunes, and that is a huge inducement.
Courtesy of an article dated April 25, 2013 appearing in TechCrunch, a press release dated April 26, 2013 issued by Amazon.com and
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