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No secret that AMZN smoked the quarter. They give sparse guidance and disclosure -- combined with meteoric growth on a massive $48bn revenue base and sub-2% margins, this company has never been afraid to print a number three standard deviations from the mean. 

Importantly, after 3 quarters of deterioration in the underlying 2 yr top line trends, 1Q marked a reacceleration in growth with the midpoint of 2Q guidance suggesting additional improvement in underlying trends moving through 1H. Although EBIT guidance of (-$260mm) to $40mm was shy of expectations ($152mm E), its worth noting that AMZN has remained profitable after guiding to a potential operating loss in both of the last 2 quarters. 

What Drove the Beat?

 

Revenue: +34% vs. +31E (North America contributed 20 points of growth, Int’l 14 points)

  • North America: +36% vs. +34E
  • International: +31% vs. +28E

 

Gross Margin: +114bps vs. -47E

SG&A: +54% vs. +46E (+295bps as % of sales vs. +230)

 

EBIT Margin: -181bps vs. -277E

Equity Method Investment (net of tax): $89mm benefit vs. $17mm unfavorable impact LY ($0.19 benefit)

 

Below is the AMZN SIGMA and the Key Takeaways from this evening’s conference call:

Quarterly Review:

 

TTM FCF: -39% to $1.15bn

ROIC: 12% (Down from 24%)

Stock repurchase in Q: 5.3mm shares at $960mm

P&L

North America: +36% Sequential Deceleration

  • Media: +17% Acceleration
  • EGM: +45% Deceleration
  • Other: +65.3% Acceleration
  • EBIT margin: -61 bps

International: +31% (+32% constant currency) Sequential Acceleration

  • Media: +21% (+18% cc) Acceleration
  • EGM: +40% (+42% cc) Acceleration
  • Other: +24% (+26% cc) Deceleration
  • EBIT margin: -313 bps

Worldwide: +34% (+34% constant currency) Sequential Deceleration

  • Media: +19% (+19% cc) Acceleration
  • EGM: +40% (+43% cc) Deceleration
  • Other: +61% (+61% cc) Acceleration
  • EBIT margin: -181 bps

 

Additional Metrics:

Worldwide paid unit growth: +49%

Active Customer Accounts exceeded 173mm

Worldwide active seller accounts exceeded 2mm

Seller units: 39% of paid units vs. 35% paid LY

SG&A: +54% (+295bps as % of sales)

Fulfillment: +52% (+115 bps as % of sales)

Marketing: +47% (+32 bps as % of sales)

Technology/Content: +63% (+129 bps as % of sales)

G&A: +50% (+17 bps as % of sales)

Other: +39% (+1 bps as % of sales)

Balance Sheet:

Inventories: +47% (turns 10.4, down from 11.6 LY)

Accounts payable days down 62 from 66

Capex: $386mm (reflects business growth, investments in tech infrastructure incl AWS and additional capacity to support fulfillment operations)

2Q Guidance:

Revenues: $11.9 billion to $13.3 billion (+20%-34% vs. +30E)

  • Anticipates 240bps unfavorable impact from FX

Operating Income: $(260) million and $40 million vs. $152.4

Capex: $0.8 to $0.9bn

 

 

Q&A Rundown:

2012 Fulfillment Center Plans:

  • Have announced 13 fulfillment centers thus far for 2012
  • Any changes will be announced but experiencing strong growth at retail as well as third party growth increasing over 60%, FTA also strong

North American Operating Margins:

  • Investing heavily in both NA & International
  • Have launched new Int'l' geographies over the last few years where AMZN continues to invest which is some of the dynamic impacting international margins vs. North America

Third Party Growth

  • Strong growth across Int'l as well as North America
  • Investing on behalf of customers and sellers as well as retail for the required capacity
  • Fulfilled by Amazon having a positive impact on all of the geographies AMZN operates in

Employee base growth:

  • Adding a great deal of resources across a number of areas
  • Vast majority of Q1 employee growth in operations and customer service
  • A lot of Q4 hires are temporary with a lot of those going permanent coming out of 2011 in 1Q12

Inventories:

  • Currently have inventory on hand to support the Amazon Supply business
  • Inventory increases have been broad across a number of different business, categories and geographies

 

Amazon Supply

  • Have been serving businesses for sometime- Amazon supply is a separate URL with an interesting selection to continue to serve businesses

Kindle Fire:

  • Pleased with the growth seen in Kindle Fire
  • Customers buying a lot of content particularly in North America
  • Part of acceleration in Media growth in NA due to Kindle content

Media growth:

  • Video games are a seasonal business and brought down growth in Q4 which did not continue into 1Q12
  • Adding more video content which is reflected in top line guidance

Category headwinds/tailwinds:

  • Supply issues related to Thailand floods created a headwind in 4Q11 & 1Q12 in categories including cameras, audio equipment & office equipment- It helped in cases where third party sellers still had inventory
  • Had strong broad based growth in Q1 across many categories
  • Strong growth in kindle globally
  • AWS is growing fast

Europe impact on international sales

  • Having some impact on performance

Mobile purchasing behavior:

  • Mobile business is growing fast and is an exciting opportunity
  • Will continue to work on the category to enhance the customer experience over time

Taxes:

  • Approx 50% of sales collect a sales tax or value added tax (several states in the US today and a large number of geographies outside of the US)
  • Have good businesses in those geographies

 AMZN: Key 1Q Deltas - AMZN SIGMA