Company Watch
America Online (AOL)
Q3 Earnings Summary
AOL had yet another fantastic quarter, beating the Street by three
pennies and our model by two. Herewith, a brief run down of the key
metrics for the September quarter.
- Strong Subscriber Growth: 951K new members versus our 700K estimate;
AOL has added 4mm+ new subs in the last year alone. Word-of-mouth
buzz (read: increasing returns) and the power of the brand were key
drivers.
- Nice Advertising and Commerce Revenue: $143mm (up 15% q/q and 64%
y/y) versus our $135mm estimate. Core ad/commerce revs in-line with
our aggressive $103mm (up 24% q/q) estimate, but Merchandising and
Compuserve "other" revenue stronger. Backlog grew to $598mm (up 17%
q/q), suggesting visibility on this very profitable revenue stream is
growing nicely.
- Super Low Sales and Marketing Expenses: At $105mm (12.2%) was way
below our $113 million estimate (and we thought that figure was
wishful thinking), and still helped AOL generate their most successful
Q1 subscriber acquisition campaigns in their history. To the extent
that subscriber growth continues to motor along on the back of word-of-
mouth buzz, increasing returns, and the power of the brand, this
figure could make our out quarter estimates look positively silly in
their excess.
- A Healthy Gross Margin Increase: At 36.4%, 60 basis points below our
37% estimate, due almost entirely to better subscriber growth and
usage (at 23.5 hours per member month). Given the discretion in the
S&M line, we're happy to trade in a few basis points in gross margins
for a few hundred in S&M, since high usage has a benefit in addition
to this cost: better retention, which equals lower churn which equals
fewer S&M dollars.
In sum, the AOL business model is just hitting its stride and should
really pull away over the next few quarters. Subscription revenue is
paying the bills, ad/commerce revenue is generating great profits, and
the prickly cost lines (COGS and S&M) are in control. In short, the
story's working and the question for investors to ask themselves is:
Just how much can it work going forward? Our bet: a lot.
The Digital Cities/Netcenter Deal
AOL announced it had inked a deal with Netscape's Netcenter to offer
Digital Cities (DCI) local content on Netcenter and will take over
responsibility for programming Netcenter's Local Channel. DCI has
content from 50 US markets and has almost 5,000 marketing partners
(e.g. Barnes & Noble, Hotel Reservations Network, Cigna, Geico,
Lexus). We're assuming DCI does some around $35-45 million in
ad/commerce revenue annually and that the two year, exclusive deal
probably helps DCI more immediately than Netscape, though it's hard to
argue that local content won't become much more valuable as the
Internet matures. With CitySearch's recent merger with Ticketmaster
Online and their pending IPO, the local market should continue to heat
up. DCI has certainly made sure it won't be standing still while
CitySearch concentrates on its S-1.
Just In Time For Black Friday: 40 New Retailers
In other news, AOL added some 40 new retailers to the roster online
merchants now taking up space on AOL's Shopping Channel last week,
bringing the figure to 110 retail partners. Importantly, many of the
agreements extend to both AOL.COM and to CompuServe, suggesting that
AOL's earlier vision of leveraging a portfolio of online brands is
fast coming to fruition. Timing is important here too, given the
approach of Black Friday (a mere 21 days away) and the onset of what
should be the single biggest holiday season ever for e-commerce. Such
major brand name retailers Bugle Boy, Macy's, Toys 'R Us. Eddie Bauer,
J. Crew, JCPenney and Avon purchased (or re-purchased) AOL's digital
shelf space.
Amazon (AMZN)
Q3 Earnings Summary
AMZN had another fantastic quarter, beating our top line estimates
handily and the bottom line by a few pennies. Herewith, a brief run
down of the key metrics for the September quarter.
- Revenue: At $154 million, total revenue beat our $125 million
estimate handily (more precisely embarrassingly) and represented 33%
sequential top line growth in what is supposed to be a seasonally
slower quarter. Music sales (at 9% of total), provided much of the
boost, generating $14.4 million in revenue in the first full quarter
of availability, well ahead of our $5 million estimate (we thought we
were being aggressive with this number). This makes Amazon the largest
online seller of music around. From not competing in this market to
becoming the #1 in about three months? Now that's brand power,
execution, and leverage. Look out videos.
- Customers: AMZN added more than 1.2 million new customers in the
quarter, bringing the total to 4.5 million customers. Some perspective
is in order here, given the enormity of this number: last September
Amazon had only 940k customers, having taken them 2 years to get to
that figure; this quarter they added more customers than they were
able to for 8 quarters running. This is increasing returns at its
finest: word of mouth buzz coupled with smart marketing programs
equals outsized customer additions. If this isn't the knee of the
curve, we're not sure what is.
- Gross Margin: At 22.7%, gross margins were up 10 basis points
sequentially and exactly in-line with our estimate. With music sales
so strong in the quarter (recall that they carry lower gross margins),
the sequential increase speaks to Amazon's efforts on the inventory
front, where they stock ahead those titles they anticipate selling
most successfully and get a lower COGS for each book. Inventory stands
at $20 million on the balance sheet and inventory turns stand at 26
days (up from 25 days last Q).
- Sales and Marketing: Total S&M expenses in the quarter were $38
million (24.4% of revenue), exactly in-line with our $38 million
estimate, but much lower on a % of revenue basis, thanks to the higher-
than-expected top line. Despite Amazon's stated intention of spending
excess monies (read: top-line surprises) on branding and customer,
management indicated that they held back on spending a greater amount
because they weren't satisfied with the ROI dynamics of spending much
more than this in the September quarter.
Because Amazon tends to do a remarkable job at "monetizing" their
customers once they get them to make their first order (that is,
generates greater and greater revenue from them by increasing
purchasing frequency and purchase size), we believe even more optimism
is in order for the next handful of quarters. With 1.2 million new
customers ready to purchase (and purchase more) in the December
quarter, we're hard pressed to envision a scenario in which Amazon
doesn't have another awe-inspiring quarter (recall that 40% of book
sales take place during the holiday season). We know we'll be doing
our part to make Amazon's December quarter look spectacular; where
else is there to go for your holiday gift giving? |
