Summary: Amazon’s Q1 was fine–just ahead of consensus on revenue, operating income, and EPS–but guidance for the balance of the year was mixed. Company appears to be healthy, and long-term story seems intact. Short-term margin and valuation concerns will persist, however: After factoring in upside from the quarter, the Audible acquisition, and a change in currency assumptions, the guidance for the rest of the year was actually down modestly. Stock down 5% in aftermarket on this.
Issues: Strong overall growth, but US business decelerated significantly, primarily from weakness in Media relative to growth rates of past few quarters. Full-year adjusted operating income guidance increased only modestly and GAAP operating income guidance was cut. Organic revenue guidance is just below the company’s previous expectations. Tom asked repeatedly about economy, but effectively declined to answer. Said reads same stuff everyone does, but overall demand seems healthy (albeit not at Q4 levels).
Revenue slightly ahead of consensus: $4.14 billion vs. $4.08 consensus. FOREX contributed 6 percentage points of growth. 31% organic versus 37% reported.
- US growth decelerated significantly, from 40% to 31%, primarily due to a slowdown in Media sales (this will be important to understand).
- International growth steady at 44% (significant benefit from FOREX). Now accounts for 48% of revenue. Electronics particularly strong, media maintained growth rate.
Operating Income at top of guidance range: $198 million vs. $155-$200mm range. Operating margin flat with last year and last quarter, which will likely add to concerns that margin has peaked (especially in light of somewhat disappointing full-year operating income guidance–see below).
EPS (GAAP) beat consensus by $0.02: $0.34 versus $0.32.
Guidance above consensus:
- Q2 guidance $3.9 billion to $4.1 billion, versus current consensus of $3.8 billion. This calls for revenue acceleration, which is very positive. [The guidance does assume a change in currency assumptions and the acquisition of Audible, however, which should temper enthusiasm]
- 2008 guidance modestly above consensus: $19.1-$20 billion vs. consensus of $19.3 (and a modest increase from previous guidance of $18.8 to $19.8). This could have been slightly stronger.
- 2008 operating income is LOWER THAN PREVIOUS GUIDANCE, HOWEVER… Full year op inc guidance cut to $740-$940 from $785-$985 guidance after Q4. However, both numbers include amortization of intangibles, and the current guidance includes a bigger number: $285 million vs. $240 million in Q4. On an operating basis, therefore, Amazon has modestly increased pro forma operating income guidance from $500-$710 to $545-$745. Given the operating income upside in this quarter, though, this will still strike some as a disappointing profit outlook.
CONFERENCE CALL NOTES
5:02 ET: Still hold music…
5:08 ET: Tom, live… going through numbers. Mostly in release. Guidance “appropriately conservative.” FOREX assumptions particularly hazardous.
Sky-level questions about “lifetime value” and international third-party. Isn’t Jeetil curious about quarter? Bezos “happy sellers, buyers, etc.” Tom: growing fast. Happy so far, etc. Can’t Jeetil take this up at investor day or something? Yawn.
Imran Khan: International growth? 16 category launches last year. A lot of newer categories early, no pricing scale. Growing fast third-party, etc.
Pricing strategy? Low prices.
Heath Terry: International third-party… Overall, third party units now 30% in q, up from 29% last year. Active seller accounts growing nicely (17% y/y), accelerating. Lots of positives third-party business.
[Isn’t anyone curious about why US media hit a wall? Whether guidance includes Audible? Why guidance is down? Come on, folks!]
Digital initiatives, international? MP3 international this year, no more to add to that. YAWN. Take it up at investor day.
David Joseph: Guidance? Economy? [thank you] Increase in revenue…don’t read much into it. Largely unchanged from 90 days ago. We don’t have lots of data points on economy. We see how our business doing. In Q1, both revenue and op inc strong.
Grocery and wine sales taxes? Too early to comment.
[Can we have some questions from analysts who care about financial analysis, please? How about “WHY DID US MEDIA HIT A WALL IN QUARTER?” “IF YOU EXCLUDE AUDIBLE AND FOREX CHANGE IT SEEMS YOU CUT OUTLOOK–TRUE?]
Kindle [Oh my goodness]. “Extremely happy…” Amazon Web Services “Very pleased.” Other revenue includes Amazon web services.
Mark Mahaney, Citi: ROIC down from 50% levels of last couple of quarters…why? Any move toward consumer staples from media? [THANK YOU, MARK]. ROIC mostly seasonality. Consumer staples? Can’t really comment. We’re seeing broad, strong growth across key sales breakouts. Seeing individual segments.
Any recessionary impact in US in certain categories? You can see based on results globally fine [NON ANSWER]. Difficult to say. We’re seeing pretty good strength across categories. [WHY WONT TOM ADDRESS US in PARTICULAR?]
Doug Anmuth, Lehman: Media sales material deceleration, Audible in guidance? [THANK YOU, DOUG!!!] Audible now in guidance, wasn’t in guidance 90 days ago (translation: guidance cut). Claim to be pleased with media growth despite deceleration. Same growth as last year, etc. Doesn’t explain sudden slowdown. Was [acceleration the result of Harry Potter and this is back to trend?]
Economy? Can’t add much more. We thought growth strong, broad-based. Growth decelerated from Q4 (37% to 31%), but an acceleration on dollar basis from Q1 last year. Certainly what we read suggests it’s tougher environment, but we feel good and it’s broad-based.
Revenue vs. Units–revenue faster than units last few quarters, shift to electronics? Actually, FOREX. 31% unit growth and 31% revenue growth.
James at Goldman: Jump in unearned revenue? Kindle, etc. (and other things).
Guidance include boost from US rebate stimulus? Not explicitly.
Kindle still supply-constrained? Jeff’s first answer. Everyone worked hard, now Kindle finally in stock.
Steve Weinstein, PacCrest: Guidance full year, change in assumptions, Audible, etc: Looks like you guided down 3%. Does this reflect change in demand? Or tactical changes [GOOD QUESTION!] I wouldn’t read too much into it. Raised guidance. Lots of little tweaks. Feel good about business.
The conference call starts at 5PM ET. We’ll be analysing both the release and call live here.
Amazon’s stock has recently surged higher despite three concerns that have dogged the stock in the past few quarters:
- Concern that margin expansion has peaked (driving momentum investors out of the stock).
- Concern that a consumer spending slowdown will limit revenue upside.
- Concern about Amazon’s high multiple relative to competitors (scaring off growth investors).
The Q1 results likely won’t soothe these concerns, as it’s hard to see Amazon blowing out the revenue line in this environment. That said, Amazon’s long-term growth story is intact: The company should continue to deliver strong, profitable growth, and a huge international business should cushion the blow from the US consumer.
- Revenue: $4.08 billion consensus, up 36%. Assumes 5 points of benefit from FOREX. (Organic growth important, so if FOREX higher and organic lower, stock will get hit).
- Pro forma Operating Income: $210-$255 million (consensus in middle of range).
- EPS: consensus $0.32 (GAAP)
- Outlook: June consensus: $3.84 billion of revenue, $0.29 EPS 2008 consensus: $19.29 revenue, $1.54 EPS 2009 consensus: $23.88 revenue, $2.12 EPS
- June consensus: $3.84 billion of revenue, $0.29 EPS
- 2008 consensus: $19.29 revenue, $1.54 EPS
- 2009 consensus: $23.88 revenue, $2.12 EPS
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