This is Blodget's analysis of the Barron's article regarding the Amazon cash postion after numbers were released for Q3 2000:
"Amazon.com – 30 October 2000
2
Summary. Amazon has not yet released a cash flow
statement for Q3, and the change in cash from Q2 to Q3
has led to confusion and skepticism about the company’s
assertion that Q3 cash flow from operations was negative
$4mm (vs. negative $76mm in this quarter last year).
Specifically, another firm and Barrons have asserted that
Q3’s cash flow from operations was actually negative
$173mm, implying that the company was dishonest on its
conference call. After performing another detailed
analysis of the Q3 press release and balance sheet, we
remain comfortable with the company’s calculation. The
difference of opinion appears to boil down to the
distinction between “cash flow from operations” and “free
cash flow,” as well as the treatment of two transactions.
We also don’t believe Barrons took into account the
impact of foreign exchange rate changes (specifically, the
fall of the Euro against the dollar), which in our estimation
cost the company $50mm. We estimate that Amazon’s
“free cash flow”—cash flow from operations minus capex
but before FOREX impact—was approximately negative
$60mm. We won’t know the exact impact of any of this
until the cash flow statement is released in the 10Q in a
week or two.
Ending cash position. An analysis of cash flow begins
with Amazon’s cash position at the end of Q3. The
company’s cash and marketable securities balance at the
end of Q3 was $900mm. As footnotes to the Q3 press
release make clear, it is important to note that this balance
included $96mm of equity securities in Webvan and
Sotheby’s, which were reclassified from “other
investments” as a result of changes in the company’s
partnership with each company. Since the end of Q3, the
value of Webvan stock has fallen precipitously, which
suggests that Amazon’s cash balance has also declined
since then (although the company may well have sold
some of the Webvan stock). If the company has sold no
Webvan stock, we estimate that the value of the $96mm of
Webvan and Sotheby’s securities has declined by a total of
$40mm, to $56mm. Assuming no other changes in the
cash and marketable securities balance, this would suggest
that Amazon now has about $850mm in cash and
marketable securities. We arrive at this conclusion by
estimating that the value of the company’s original
Webvan stake was $68mm at September 30 (29.6mm
shares at $2.31 per share) and is now $28mm (29.6mm
shares at $0.90 per share). This assumes that the company
has held all of the estimated 29.6mm Webvan shares it
received when Webvan acquired Homegrocer, which it
probably hasn’t. The value of the Sotheby’s stake,
meanwhile, has increased an estimated 7% since
September 30, to an estimated $29mm.
Calculating Q3 cash flow from operations. Amazon
stated on its conference call that “cash flow from
operations” was negative $4mm, a statistic that we cited in
our Q3 results note. Another analyst and Barrons have
since suggested that this claim is incorrect—that the
company actually burned $173mm from operations. After
a second detailed review of the press release and balance
sheet, we again conclude that Amazon’s cash flow from
operations was in the neighborhood of negative $4mm (the
exact calculation will have to wait for the cash flow
statement). We perform the following steps.
1. We start with pro forma net income of negative
$89mm (which excludes non-cash and one-time
items).
2. We add estimated depreciation and amortization of
$23mm, to get $66mm in gross cash flow from
operations.
3. We add the contribution from the balance sheet, a total
of $47mm (composed of +$8mm contribution from
inventories, -$13mm use in prepaids, +$18mm from
accounts payable, +$26mm from deferred revenue, -$
6mm use in interest payable, +$13mm from other
liabilities, and -$1mm to current long-term debt).
4. We conclude that cash flow from operations was,
roughly, negative $19mm (-$66mm plus $47mm from
the balance sheet), a difference of about $15mm from
the company’s stated negative $4mm. We assume
that other minor adjustments make up the difference
between this and the reported number.
Treatment of inventory sale and increase in deferred
revenue. The other firm and Barrons’ assert that Amazon
misrepresented cash flow from operations by including the
impact of the $20mm sale of inventory to ToysRUs and
the $57mm in cash payments from commerce partners in
the calculation. In our opinion, neither unfairly skewed the
calculation. First, the sale of inventory to ToysRUs was
made at cost—Amazon booked $20mm of revenue and
$20mm of cost—so the effect on gross cash flow was zero
(if the argument is that the sale artificially boosted the
contribution from the balance sheet, this might or might
not be valid, depending on whether Amazon would
otherwise have sold the inventory in the period—life’s too
short to argue that one...). Second, the impact of the
$57mm in cash payments were included in the short-term
deferred revenue balance, which is included in the
“changes in operating assets and liabilities” section of the
cash flow from operations calculation. Under traditional
calculation methodology, the $26mm net change in
deferred revenue is considered cash flow from operations
(the $26mm being composed of outflow of $31mm, which
includes both recognized revenue and, presumably, write-downs
of the value of equity securities booked as deferred
revenue, and the $57mm inflow from cash payments).
Reconciling the change in cash to cash flow from
operations. The total change in cash was negative
$104mm, after factoring in the positive contribution of
$96mm in reclassified equity securities (the balance sheet
showed a change of $8mm, from $908mm to $900mm).
We believe the “missing links” are 1) capex and 2) impact
of foreign exchange (namely, the fall of the Euro against
the dollar). Amazon spent $42mm on capex in the quarter.
The Euro also fell significantly against the dollar in the
quarter, the impact of which we believe can be seen inAmazon.com – 30 October 2000
3
both the cash balance and the debt balance. The company
raised about $650mm in euro-denominated bonds in
February. According to the second quarter’s 10-Q, the
company has kept the proceeds from this offering in Euro-denominated
money-market funds totaling $664mm at
June 30. At the end of Q3, the company’s debt balance
had dropped $49mm from the end of Q3: 2% as a
percentage of the total debt balance and 7% as a
percentage of the $664mm Euro-denominated debt balance
at the end of Q2. We therefore conclude that the
company’s cash balance, once translated to dollars, also
declined by approximately $50mm, simply as a result of
the fall of the Euro. The impact of capex and foreign
exchange conversion on the cash balance, therefore, was
likely $90mm or so. Adding the back-of-the-envelope
$19mm loss from operations, this results in a negative
change in cash of $109mm—close to the actual change of
$104mm.
"
Please note at the conference call on October 22, 2000, Jeff Bezos stated that cash would go not lower than $700 million by the end of Q1 2001 and then would rise due to positive cash flow. The following is the analysis.
Now cash flow analysis for the end of Q3 2000 written on October 25, 2000:
"Amazon.com – 25 October 2000
(Continued)
2
Summary. We believe this quarter may represent an
important inflection point for Amazon.com the company
and AMZN the stock. The company made striking
progress toward profitability while maintaining solid if
unspectacular revenue growth (+79% y/y). We continue to
believe Amazon has more than enough cash to reach
break-even (we do not expect cash balances to dip below
$600mm), and we believe the relevant question about the
company is less “can it make money?” than “how much?”
If the current operating profitability in the U.S.
books/music/video business is any guide (6%, a $100mm
run-rate), the answer will likely be “a lot.” (our current
2002 FCF estimate is $0.50-$0.75). In a tough retailing
environment, moreover, Amazon’s projected 45% growth
in 2001 looks quite impressive. In Q3, the company
exceeded estimates in all major metrics, including revenue,
gross and operating margins, customer count and EPS.
The balance sheet improved (inventory decreased and
turns increased), cap-ex was lower than expected, and cash
burned from operations decreased to $4mm from $76mm
last year, despite preparations for the holiday season. We
believe Amazon will turn FCF positive permanently in
2001 and could reach operating profitability in Q401
(although consensus is likely to show a loss). We continue
to regard AMZN as a good long-term investment. We
expect the stock to trade higher based on better than
expected Q3 results and improved sentiment toward e-commerce
headed into the holidays.
Revenue. Revenue of $638mm increased 10% seq, (79%
Y/Y), ahead of est. of $600mm. This represented a
continued deceleration from 95% in Q1 and 84% in Q2.
The rate of revenue growth remains our single largest
concern about Amazon, but at this point we believe growth
is likely to stabilize in the 50%/yr range. Excluding
$30mm in revenue from Amazon Commerce Network
(ACN), $9mm of which was cash, and $20mm from
ToysRUs for the sale of toy inventory at cost, merchandise
revenue increased a more modest 65%. Trailing-twelve-month
revenue per active customer in Q3 (the closest
analog to same-store sales) which included ACN revenue
but not revenue from ToysRUs, increased nicely 20% Y/Y,
to $130, up 4% sequentially.
Efficiency. The brightest spot of the quarter was
continued Q/Q evidence of operating leverage and margin
improvement at both the gross and operating level. Gross
margin of 26.2% (the best since inception by a long shot),
far exceeded our estimate of 23.5%, as a result of
improving shipping margins, better inventory allocation/
management, increased co-op advertising, and a higher
percentage of direct sourcing. Management reiterated its
goal of achieving a mid to high single digit operating
income loss margin in Q4 and op loss to less than 5% for
the full year 2001. We believe the company will turn FCF
positive permanently in 2001 and progress toward triple-digit
returns on invested capital thereafter. Thanks to
sharp improvement in gross and operating margins,
operating EPS d$0.25 was well ahead of our estimate of
d$0.32.
Cash position and burn. Amazon ended the quarter with
approximately $900 million in cash and equivalents and
burned only $4 million in the quarter from operations.
This is an improvement from the $320mm burned during
Q1 and the $100mm burned in Q2. Capex of $42mm was
lower than expected, and the company now expects to
spend only $125mm in capex in 2001, vs. the prior
$200mm estimate. We expect Amazon to generate
positive cash flow for Q4 and to exit the year with more
than $1.0 billion in cash on the balance sheet.
Revenue Breakdown. International revenue grew to
$88mm, up 121% Y/Y (19% seq.). Approximately 23% of
revenue (flat from Q2) came from international orders,
both foreign orders to the US site and orders to the UK,
German and French sites. Revenue in US
books/music/video business grew a modest 33% Y/Y to
$400mm, up 4% sequentially from $385mm in Q2 and flat
from Q1’s $401mm. ACN revenue was $30mm, with
approximately 30% (or $9mm) in cash, an increase from
approx. 17% in Q2. We expect ACN revenue to grow
gradually through 2001 and for approximately 70% of
ACN revenue in 2001 to be in cash. The company
disclosed that it is in a “dialogue” with the SEC about the
certain aspects of the ACN revenue accounting, namely the
booking of equity as revenue (we believe this practice
should be eliminated). We do not place a high value on
this revenue, in any case. We are maintaining our revenue
estimate for Q4 of $1.0 billion. Revenue for 2000E and
2001E is $2.7 billion and $4.0 billion, respectively.
New customers increased 2.8mm, well ahead of our
2.0mm estimate and sequentially up from the 2.5mm
added in Q2. Approximately 800,000 of these new
customers were added in Europe. Gross customer
accounts now number more than 25mm, with more than
3.9mm internationally. Customer acquisition cost
decreased slightly to $15 from $17 in Q2 and was ahead of
our $18 estimate. The percentage of orders from repeat
customers remained flat at 78%.
Gross margin increased 3 points seq. to 26% (highest
gross margin since inception), well ahead of our estimate
of 23.5%. Excluding the sale of $20mm of toy inventory to
ToysRUs, GM was an even better 27%. Excluding ACN,
GM was 24% (still the highest product margin ever).
Improvement from: 1) shipping margins (positive 10.5% in
Q3), with fewer split shipments and reduced long zone
shipping, 2) better inventory management: inventory levels
have actually decreased while revenue and COGS have
increased, 3) improved vendor management, with a greater
percentage of purchasing now direct from vendors vs.
wholesalers and 4) increased high-margin partner revenue
($30mm in Q3). We expect gross margin to decrease seq.
in Q4 to approximately 23% as a result of inefficiencies
expected during the holidays related to split shipments, but
expect continued improvement again during 2001."
Now comments on Q4 2000 numbers:
"Amazon.com – 31 January 2001
2
Summary. Amazon reported Q4 results that were slightly
better than the preliminary numbers reported three weeks
ago. The company committed to break-even in Q4, but cut
its overall 2001 revenue and EPS forecasts even more than
expected. As a result of slower-than-expected growth, the
company will close its Georgia DC and lay off about 1,300
employees. The big issue for the company remains
revenue growth, not cash, and it has become clear over the
last few quarters that the rate of e-commerce growth in the
next few years is likely to be significantly less than we
thought a year ago. Amazon’s core US books, music, and
video business grew only 11% year-over-year, suggesting
that this segment is more mature than we had expected
(and that the market opportunity as a % of total books,
music, and video sales is smaller than we expected). Six
months ago, we thought that Amazon would be able to
grow about 30%-40% annually for the next several years.
Now, we estimate the long-term growth rate to be in the
20%-30% range. We are maintaining the Accumulate/Buy
rating because we believe this is largely in the stock, and
we do not expect the situation to get much worse.
Revenue. Revenue of $972mm increased 52% seq, (+44%
Y/Y), below our estimate of $1.0 billion but ahead of
preliminary results of $960mm released earlier this month.
44% Y/Y growth represented a continued deceleration
from 84% in Q2 and 79% in Q3. Revenue growth was
likely slowed to some extent by 1) the recession, 2)
cannibalization of some sales by local country stores, and
3) enormous e-commerce hype in Q4 and Q1 last year,
which created a difficult comparison. Our fear, however,
is that the main explanation is that the e-commerce
opportunity is not, in fact 10%-15% of retailing revenue in
some promising market segments, but perhaps 5%-10%.
Excluding $73mm in revenue from Amazon Commerce
Network (ACN), $50mm of which was cash, merchandise
revenue (including shipping revs) increased only 33%
Y/Y. Trailing-twelve-month revenue per active customer
in Q4 (the closest analog to same-store sales, but not a
particularly meaningful metric, in our opinion) which
included ACN revenue, increased 16% Y/Y, to $134, up
3% sequentially.
Cash position and burn. Amazon ended the quarter with
approximately $1.1 billion in cash and equivalents and
generated approximately $248 million in the quarter from
operations. For the full year 2000, Amazon burned only
$130mm in cash ($265mm with cap-ex) and actually
generated approximately $190 million in the last 9 months
of the year. Capex was $37mm in Q4 and $135mm for the
full year. This was lower than we had expected.
Management expects to spend only $120mm in cap-ex in
2001 (vs. a $200mm estimate earlier this year) and does
not expect to add any new capacity. Management said
they do not expect to have to raise any additional cash,
unless the company chooses to raise cash to further
strengthen its balance sheet for strategic flexibility.
Revenue Breakdown. International revenue grew to
$145mm, up 104% Y/Y (+65% seq.). Approximately 21%
of revenue (down from 23% in Q3) came from
international orders, both foreign orders to the US site and
orders to the UK, Germany, France and Japan sites.
Revenue in US books/music/video business grew a modest
11% Y/Y to $512mm. Early Stage and Other revenue
grew to $316mm, up 118% Y/Y and 110% sequentially.
ACN revenue came in higher than expected at $73mm,
with 69% (or $50mm) coming in cash, an increase from
approx. 17% in Q2 and 30% in Q3. We expect ACN
revenue to grow gradually through 2001 and for
approximately 70% of full year 2001 ACN revenue to be
in cash. We do not place a high value on this revenue as
we think it is unpredictable; however, as the absolute
dollar contribution becomes larger this revenue stream
could have a meaningful positive impact on the model with
gross margins exceeding 50% in Q4.
Cutting estimates. Based on slower than expected Q4 e-Commerce
growth and Amazon management’s outlook for
2001, we are lowering our revenue estimate from $4.0
billion to $3.5 billion. For Q1, we are looking for a 30%
sequential decline in revenue to $677mm (up only 18%
Y/Y from Q1 00).
"
And finally analysis as a response to Suria again:
Amazon.com – 12 February 2001
2
Summary. A competitor recently suggested that
Amazon’s liquidity position is more tenuous than its year-end
cash balance of $1.1 billion might suggest. The
analyst focused on Amazon’s working capital, which has
declined steadily over the last few quarters, and estimated
that it would turn negative in Q3 this year. The analyst
argued that this negative working capital will cause
Amazon’s vendors to insist on tighter payment terms,
which would put additional pressure on Amazon’s cash
and working capital, which would result in tighter terms,
and so on. The analyst suggested that this “liquidity
squeeze” would put Amazon in deep financial trouble by
year-end.
After carefully reviewing the competitor’s assumptions
and Amazon’s liquidity position, we remain comfortable
with the latter. We do disagree with some of the
competitor’s key assumptions. Our assumptions match
our competitor’s in one respect—we, too, estimate that
Amazon’s working capital balance will turn negative by
year-end. Importantly, however, because of the dynamics
of Amazon’s working capital, we do not believe that this
alone would be a concern to vendors. Because Amazon
has a negative operating cycle (it gets paid for its
inventory before it pays for it), we estimate that the
company will still have more than $850mm in cash to pay
its year-end bills even if its working capital is zero.
Over the last year, Amazon’s focus on efficiency has
begun to pay off. Operating losses, inventory
management, gross margin, operating margin, and
fulfillment have all begun to improve. As long as these
trends continue, we believe the company will be able to
turn an operating profit in Q4 (if any of these trends stop
improving, we will obviously re-evaluate our comfort
with the liquidity position).
Working Capital vs. Cash. In Amazon’s case, we believe
that cash, not working capital, is the best measure of near-term
liquidity (this said, of course, Amazon must start
generating cash from operations before too long—its
negative operating cycle won’t shield it forever).
It is true that cash is not the only relevant measure of
liquidity: companies can fluff up their cash balances to
appear richer than they are by stretching out the time they
take to pay their bills. It is important to understand,
however, that Amazon is NOT taking longer to pay its
bills than it used to—on the contrary, it’s paying them
significantly faster than it used to and also faster than
some others in the industry (please see comparable
company analyses). It is also important to understand
that, in contrast to most land-based retailers, Amazon's
operating working capital (operating assets and liabilities,
excluding cash and debt) does not consume cash, it
GENERATES cash. This means that once Amazon
reaches break-even, it could operate indefinitely with
negative working capital and no additional financing. It
also means that vendors are likely to understand that a
negative working capital position at Amazon would not,
in and of itself, be a sign of a liquidity crisis.
Analyzing Working Capital. Because of the seasonality
in Amazon's business and cash cycle, it is important to
look at working capital on a year over year basis (an
analysis of the last three quarters doesn’t tell the whole
story). Excluding the impacts of financing, currency
conversion, and a reclassification of securities, which
made a combined positive contribution of about $700mm,
Amazon's working capital has declined by about $600mm
over the last twelve months. The primary uses of working
capital were: 1) net cash losses ($417mm), 2) capex
($135mm), and 3) investments ($62mm). It is important
to note that, because of the dynamics of the balance sheet
(working capital generates cash), the use of cash over the
same period was only about $290mm ($226mm before
investments).
The major differences between our assumptions and our
competitor’s are on the balance sheet: 1) inventories, 2)
prepaid expenses, 3) payables, and 4) accrued expenses.
The delta translates into a year-end cash balance of about
$850mm versus our competitor’s forecast of about
$150mm. Importantly, the entire difference results from
the balance sheet, not operating losses (we are actually
forecasting a higher operating loss than competitor is).
PLEASE SEE OUR FULL REPORT FOR DETAILED
CASH FLOW ANALYSIS AND ASSUMPTION
COMPARISON."
All emphaisis are mine. Please note in the above report Blodget admits Amazon is not cash flow positive contrary to what he stated two weeks prior regarding the same Q4 2000.
Glenn |
