07:33am EST 27-Jan-99 Bear Stearns (Ehrens,Scott 212/272-9382) AMZN
AMZN: Reports Terrific Fourth Quarter:ROIC Is Key (Not Gross Margin)(Part 2 / 2
(Part 2 / 2)
Outstanding Quarterly Results
Amazon.com had pre-released revenue numbers earlier this month so
while the total figure was not in doubt, the revenue segmentation
provided additional positive results. Total revenue reached
$252.8 million in the fourth quarter, up by a whopping 65%
sequentially and by 313% year over year, well ahead of our
estimate of $185 million. International sales accounted for 19%
of total revenues or $48 million, fueled by the expansion of
Amazon.com into Germany (amazon.de) and the U.K. (amazon.co.uk).
For the first time consumers in these two countries have access
to local Amazon branded web sites and are now serviced from
distribution centers within their own borders. Although building
off small numbers, the two new local editions increased their
revenues nearly 4x over the combined third quarter sales,
establishing both as the number one online booksellers in their
respective countries. Additionally, Amazon.com noted that music
sales represented $33.1 million, an increase of 130% over third
quarter sales. Revenues from all new expansion areas which have
been in operation for only a few months (music, video, Germany,
and U.K.) accounted for 25% of total revenues, highlighting the
increasing diversity among the company's revenue sources.
Gross margins decreased to 21.1%, down from 22.7% last quarter,
due to several reasons. While some may pint to this statistic as
an indication of weakness in the business model, we believe
otherwise and would point to our ROIC analysis. Amazon.com
explained the sequential decline by noting the shift in product
mix from higher margin books to lower margin music, video, and
European sales. The company also noted that holiday shoppers
purchased more hard-covers which carry deeper discounts than soft-
cover counterparts. Gift certificates for product delays and
aggressive pricing in the video sector also contributed to the
gross margin decline.
Amazon.com made significant improvement in operating expenses
which fell as a percentage of sales to 28.2% from 36.2% in the
third quarter. Marketing & Sales expense was roughly $2 million
higher than we had anticipated and accounted for 19.2% of sales,
down from 24.4.% last quarter, marking the first time this number
has been below the 20% level. Included in Marketing & Sales
expense are fulfillment costs, customer service and advertising.
The company stated that the increase in marketing and sales was
mostly due to increases in fulfillment costs. Therefore we
estimate that fulfillment and customer service increased to $27.8
million or 11.0% of revenues. This implies advertising expense
of $20 million, or 8% of sales, which means that the average cost
to acquire a new customer declined by 15% to $12.17 from $14.34
in the third quarter.
Product and Development expense was $17.3 million, about $2.3
higher than our estimate due to new technological initiatives and
investments. However as a percent of sales, product development
expense fell to 6.8%, down from 130 basis points from both the
third quarter and our estimate. General & Administrative expense
was almost $0.5 million ahead of our estimate, at $5.5 million,
and was 2.2.% of sales, down from 3.2% of sales last quarter and
below our 2.8% estimate. Amazon.com achieved this low level
despite the added costs of overtime and temporary workers to
fulfill the abundance of orders during the holiday season. On a
pro forma basis (i.e. before the effect of goodwill associated
with recent acquisitions) Amazon.com lost $17.8 million on the
operating line. The operating loss represented 7.0% of sales,
narrower than last quarter's 13.7% loss, and narrower than our
estimate of a 13.3% loss.
EPS and Balance Sheet Looking Good
On a pro-forma basis Amazon.com had an EPS of $(0.14), beating
our estimate of a loss of $(0.19) per share and First Call
consensus of ($0.18) per share. On a GAAP basis including $24.3
million in one-time merger expenses and goodwill, the EPS loss
was ($0.30). Amazon.com continues to state that it would plow any
revenue greater than its internal estimates back into the
business. They also stated that they will only do so if
appropriate investments present themselves. Amazon.com's strong
balance sheet allows the company to pursue this aggressive
strategy due to its total cash and marketable securities balance
of $373 million.
Outlook
In brief, we are raising our 1999 revenue numbers and increasing
our loss per share estimates while establishing our full year
2000 estimates. Our new estimates are as follows: 1Q Revenues of
$255 million (was $200 million), and FY 1999 revenues of $1.24
billion (was $930 million). Due to the expected increase in
product development costs in the first half of 1999 and flat
gross margin conditions, we are lowering our1999 EPS estimate to
($0.93) from ($0.58). For the year 2000 we are looking for $1.7
billion in revenues. As Amazon.com begins to realize the leverage
in the operating model, we expect revenue growth to outstrip
expense growth and lower the loss per share to ($0.27) for 2000.
Our per-share loss estimates are detailed on page one of this
note.
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