02:23pm EST 5-Jan-99 Credit Suisse First Boston (Buyer, Lise (650) 614-5088)
AMZN: Amazon Releases 4Q Revenues FBC
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research Americas
U.S./Technology/Internet-New Media
Lise Buyer 1-650-614-5088 lise.buyer@csfb.com
Tracey Ford 1-650-614-5157 tracey.ford@csfb.com
BUY
LARGE CAP
Amazon.com (AMZN)
Summary
Amazon's release of preliminary Q4 revenues of $250 million
were 20% ahead of the high end of the published range but
were below some of the wildly aggressive rumors.
The company generated just over $50 on a revenue per average
customer basis in Q4 1998 as compared to $53 per average
customer in Q4 1997. The 1998 result is particularly
impressive given the addition of music, a lower price point
product, to this year's mix.
Amazon.com "opened its doors" on the World Wide Web in July
1995, and now offers millions of book and CD titles in
addition to videos, software and other products. Amazon.com
has quickly become a leading on-line retailer and one of the
most widely used and cited commerce sites on the World Wide
Web. Amazon.com, strives to offer its customers compelling
value through broad selection, high-quality content
competitive pricing, personalization and a very high level of
customer service.
Amazon's early release of revenue for Q4 1998 was impressive,
exceeding our estimate of $198 million by 20%. Recall that
since the company is selling predominately music, video and
books, $20 million reflect is whole lot of incremental orders
. On a sequential basis, revenues increased by a stunning $
97 million, or 63%. On a year over year basis, the revenues
were up 280% in the fourth quarter and approximately 310% for
the year. (The numbers will not be final until the company
reports at the end of this month.)
While revenues are well ahead of expectations, Amazon's
release included the caution that bottom line earnings
estimates should not change much over current consensus
levels ($ -.18 Q498 eps. according to First Call as of 1/5/98
). The release mentioned two reasons for this moderately
surprising result, and we will offer a third. The company
cited increased sales of lower margin videos and CDs and
therefore suggested that gross margins will fall below the 22.
5% we had previously estimated. Secondly, the company
reminded investors that there are significant fulfillment
expenses associated with each shipment. Our take on that
comment is that business was so much better than anticipated
that the company had no choice but to bring on extra
employees as the Christmas holiday approached. Furthermore,
order levels which were so far ahead of plan required the
company to resort to more expensive last minute shipping
options in order to expedite shipment for 12//25 delivery.
As we have said on numerous occasions, one of the biggest
advantages to being an early mover in the Internet space is
the learning curve advantage. Having been through this
holiday season, the company will have more information in its
arsenal as it plans for next year's holiday season. The
result should be more efficient utilization of assets and
higher bottom line margins.
A few other bits of commentary:
While the company has reported $250 million, we believe the
actual shipments in the quarter were higher. Given the
newness of the customer base and the spike in gift giving, we
suspect that this conservative organization has set aside a
healthy reserve account (which might be required) for
returned items. While reserves don't hit the revenue line,
the company still recorded expenses associated with actually
product shipments.
On a revenue per average customer basis (quarter end
customers + quarter begin customers)/2, Amazon generated $50
in Q498. This compares with $53 for the same measure last
year. We think this result is most impressive given the
addition of lower-priced music in the mix this year versus
last.
Having reported a strong number ($250 million) instead of the
very-high end whisper numbers reduces the threat from
seasonality and makes the Q199 versus Q498 comparison somewhat
easier.
Since we do not have the complete results for the quarter, we
will make no changes to our model at this time. When the
company reports, we would expect to reflect this strong
holiday and the healthy growth in customers to be reflected
in a higher 1999 revenue estimate than our current $1.0
billion. As we believe the company will continue to increase
its customer count as well as the revenues generated by each
customer, the projection will clearly have to move up as,
with today's announcement, Amazon is already at the $1.0 run
rate.
The Stock: On a long-term basis, we continue to believe that
Amazon.com is destined for even bigger and better things. On
a short-term basis, we believe the wild runs in the stock
will have to slow at some point. We expect significant
volatility during the quarter as a series of positive
Internet company earnings releases should generate
incremental excitement some of which will likely be offset by
commentary about seasonality and as well as a large influx of
new internet offerings. Were we investors of the long-term
variety, we would sit tight. Were we fans of momentum style
investing, we would more likely reevaluate positions assuming
that there might well be opportunities to trade both out and
in to this name. We leave our Buy rating in tact but clearly
refer to the commentary above for color.
= = Amazon.com = = AMZN:BUY |
