Filed under: Amazon.com, Earnings
Amazon releases few details about some of its best known business segments, such as Prime, making it hard to judge its spending strategy. However, projections for holiday season sales were lower than expectations. As investors wondered how its ambitious spending would lead to future sales, they punished Amazon's stock, which slid 12 percent after its earnings announcement, on top of the 21 percent the company's shares have already sunk since January.
This earnings release follows the earnings announcements from the following peers of Amazon.com: eBay (EBAY), Google (GOOG), Barnes & Noble (BKS), Overstock (OSTK), Costco (COST), IBM (IBM), and Microsoft (MSFT).
Highlights
- Summary numbers: Revenues of $20.6 billion, Net Earnings loss of $437 million and EPS of -$0.95.
- Performance focused on revenue over profits; 20 percent revenue increase well below Wall Street estimates
- Third quarter net loss widened to 95 cents per share, compared to 9 cents a share net loss a year ago
- Ability to declare a higher earnings number? Year-on-year change in operating cash flow of 27.2 percent, better than change in earnings.
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| Revenue Growth (YOY) | 23.8% | 20.3% | 22.8% | 23.2% | 20.4% |
| Earnings Growth (YOY) | 85.0% | 144.9% | 31.7% | -1700.0% | -965.9% |
| Net Margin | -0.2% | 0.9% | 0.5% | -0.7% | -2.1% |
| EPS | -$0.09 | $0.51 | $0.23 | -$0.27 | -$0.95 |
| Return on Equity | -1.8% | 10.2% | 4.3% | -4.8% | -16.7% |
| Return on Assets | -0.5% | 2.6% | 1.1% | -1.4% | -4.5% |
Market Share Versus Profits
Amazon is a classic case of the need to analyze revenue growth versus profitability, because it faces a tension between growing its top-line (Sales and Revenues) more than its bottom-line (Earnings or Net Income).
Amazon's change in revenue compared to the same period last year of 20.4 percent is better than its change in earnings, which were down 965.9 percent -- confirming that the company's focus is on revenue at the expense of profits. However, this change in revenue beat the average revenue performance among the declared results of its peer group -- pointing to some likely market share gains. Also, compared to the second quarter, the past three months saw revenues grow by 6.4 percent and earnings decline by 246.8 percent.
Earnings Growth Analysis
As emphasized above, the company's earnings declined year-on-year largely because of the increases in operating costs. Amazon's operating margins (EBITDA margins) narrowed from 4.8 percent to 3.4 percent. The decline in earnings would have been worse, were it not for the fact that the company showed improvement in gross margins, from 27.7 percent to 34.9 percent. For comparison, gross margins were 30.7 percent and operating margins 5.8 percent in the immediate last quarter.
Cash Versus Earnings
Companies often achieve good performances that are not sustainable, or underperform in a way that is not likely to be repeated. In examining a stock, Capital Cube assesses the quality of the announced earnings number, as earnings numbers can be influenced by non-cash activities. By comparing the growth in earnings to the growth in operating cash flows, we can tease out the likely trend. In general, an earnings growth rate higher than the operating cash flow growth rate implies a higher proportion of non-operating or one-time activities, which are typically not sustainable over long periods.
Amazon's year-on-year change in operating cash flow of 27.2 percent exceeds its change in earnings, suggesting that the company might have been able to declare a higher earnings number. In addition, this change in operating cash flow is better than average among the declared results thus far in its peer group.
One-time Items
The company's Fire phone, which went on sale over the summer, was a big flop and Amazon announced a $170 million charge on inventory and supplier commitments to cover the failure.
EPS Growth Versus Earnings Growth
Amazon's year-on-year steep decline in earnings of -965.9 percent is worse than the -955.6 percent decline in Earnings per Share (EPS). In addition, this change in earnings is worse than the peer average among the declared results thus far in its peer group, confirming the market's belief that the company is losing ground in generating profits in this group.
Supporting Data
The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| Revenue Growth (YOY) | 23.8% | 20.3% | 22.8% | 23.2% | 20.4% |
| Peer Average Revenue Growth (YOY) | 10.3% | 14.1% | 8.2% | 11.4% | 11.8% |
| Earnings Growth (YOY) | 85.0% | 144.9% | 31.7% | -1700.0% | -965.9% |
| Peer Average Earnings Growth (YOY) | 16.4% | 14.8% | 1.6% | 4.3% | -7.9% |
| Operating Cash Flow Growth (YOY) | 87.6% | 92.5% | 8.5% | 17.5% | -10.4% |
| Peer Average Operating Cash Flow Growth (YOY) | 11.7% | 3.5% | -3.2% | 15.8% | -1.3% |
| Gross Margin | 27.7% | 30.3% | 28.8% | 30.7% | 35.0% |
| Peer Average Gross Margin | 40.1% | 43.0% | 40.9% | 42.8% | 41.8% |
| EBITDA Margin | 4.8% | 5.9% | 6.0% | 5.8% | 3.4% |
| Peer Average EBITDA Margin | 14.5% | 17.3% | 14.9% | 15.3% | 11.2% |
| Net Margin | -0.2% | 0.9% | 0.5% | -0.7% | -2.1% |
| Peer Average Net Margin | 9.5% | 10.2% | 6.8% | 8.6% | 8.7% |
| EPS | -$0.09 | $0.51 | $0.23 | -$0.27 | -$0.95 |
| Peer Average EPS | $0.58 | $0.72 | $0.96 | $0.54 | $0.31 |
| Return on Equity | -1.8% | 10.2% | 4.3% | -4.8% | -16.7% |
| Peer Average Return on Equity | 18.7% | 15.5% | 17.3% | 14.5% | 13.1% |
| Return on Assets | -0.5% | 2.6% | 1.1% | -1.4% | -4.5% |
| Peer Average Return on Assets | 8.5% | 8.2% | 6.8% | 6.2% | 7.4% |
Company Profile
Amazon.com, Inc. provides online retail shopping services. It provides services to four primary customer sets: consumers, sellers, enterprises, and content creators. The company also provides other marketing and promotional services, such as online advertising and co-branded credit card agreements. It serves consumers through its retail websites with a focus on selection, price, and convenience. It designs its websites to enable its products to be sold by the company and by third parties across dozens of product categories. It also manufactures and sells the Kindle e-reader and strives to offer customers the lowest prices possible through low every day product pricing and free shipping offers, including through membership in Amazon Prime. The company offers programs that enable sellers to sell their products on its websites and their own branded websites, earning fixed fees, revenue share fees or per-unit activity fees from these transactions. It also serves developers and enterprises of all sizes through Amazon Web Services, which provides access to technology infrastructure that enables virtually any type of business. The company operates in two principal segments: North America and International. The North America segment consists of retail sales of consumer products and subscriptions through North America-focused websites such as www.amazon.com and www.amazon.ca. The International segment consists of retail sales of consumer products and subscriptions through internationally focused locations. This segment includes export sales from these internationally based locations, including export sales from these sites to customers in the U.S. and Canada. The company was founded by Jeffrey P. Bezos in July 1994 and is headquartered in Seattle, Washington.
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